<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / / Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FRONTIER NATURAL GAS CORPORATION.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Name of Person(s) Filing Proxy Statement, if other than the Registrant:
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/X/ Fee computed on table below.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $.01 per share
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
60,640,199
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Based on the
average of the high and low sales price for the Common Stock on
February 10, 1998.
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction: $59,303,822
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$17,971
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
ONE ALLEN CENTER, SUITE 2920
HOUSTON, TEXAS 77002
Dear Shareholder: April 24, 1998
You are cordially invited to attend a Special Meeting of shareholders of
Frontier Natural Gas Corporation (the "Company") to be held at One Allen Center,
Suite 2920, Houston, Texas 77002, at 9:00 A.M., Houston, Texas time on May 14,
1998.
At the Special Meeting, you will be asked to (i) approve the Acquisition
Agreement and Plan of Exchange dated as of January 19, 1998, as amended (the
"Acquisition Agreement"), among the Company, Esenjay Petroleum Corporation
("Esenjay") and Aspect Resources LLC ("Aspect"), pursuant to which the Company
will acquire certain assets from Esenjay and Aspect in exchange for the
Company's issuance of shares of the common stock, par value $.01 per share, of
the Company ("Common Stock"); (ii) approve a recapitalization of the Company
pursuant to which each presently outstanding share of Common Stock will be
converted into 1/6th of a share of new common stock, par value $.01 per share,
of the Company (the "Reverse Split") with any resulting fractional interests
being rounded up to the next whole share; (iii) approve a plan and agreement of
merger pursuant to which the Company will reincorporate in the state of Delaware
and will change its name to Esenjay Exploration, Inc. (the "Reincorporation");
(iv) elect seven directors contingent upon the consummation of the Acquisition
Agreement; and (v) transact such other business as may properly come before the
Special Meeting or any adjournment thereof. These matters and the procedures for
voting your shares are discussed in the accompanying Notice of Special Meeting
and Proxy Statement.
Approval of the Acquisition Agreement is important because upon
consummation, the Company will substantially increase the scope and diversity of
its portfolio of projects to implement the Company's focus on exploration and
related developmental drilling projects. If the Acquisitions are not completed,
the Company will be required to sell substantial interests in its existing
projects to fund ongoing operations. The Reverse Split is designed to result in
an increase in the trading price for the Company's Common Stock. Such a market
price increase is important because the bid price of the Company's Common Stock
currently does not meet minimum requirements for continued listing on the Nasdaq
Small-Cap Market. In addition, if the Reverse Split is not approved, the Company
will not have sufficient shares available for issuance pursuant to the
Acquisition Agreement. The Company believes that election of its nominees for
director will enhance the Company's management team and provide experience and
guidance in the Company's planned exploration and development programs.
Therefore, the Board of Directors believes that the approval of the Acquisition
Agreement, the Reverse Split and the election of its nominees for director all
are in the best interest of the Company and its shareholders.
The adoption of the Reverse Split and the Reincorporation requires the
affirmative vote a majority of the issued and outstanding shares of Common
Stock. Approval of the Acquisition Agreement requires the affirmative vote of a
majority of the shares of Common Stock present at and entitled to vote at the
Special Meeting. Directors are elected by a plurality of votes cast at the
Special Meeting.
YOUR PARTICIPATION IN THE COMPANY'S AFFAIRS IS IMPORTANT. THE FAILURE TO
VOTE IN PERSON OR BY PROXY, OR ANY ABSTENTION FROM VOTING, WILL HAVE THE SAME
EFFECT AS A VOTE AGAINST THE REVERSE SPLIT AND THE REINCORPORATION, AND THUS,
AGAINST THE ACQUISITION AGREEMENT SINCE APPROVAL OF THE REVERSE SPLIT IS
REQUIRED TO CONSUMMATE THE ACQUISITIONS. TO INSURE YOUR REPRESENTATION ON THESE
IMPORTANT MATTERS, IF YOU DO NOT EXPECT TO BE PRESENT AT THE SPECIAL MEETING IN
PERSON, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED POSTAGE PREPAID ENVELOPE THAT HAS BEEN PROVIDED FOR YOUR CONVENIENCE.
Sincerely,
/s/ DAVID W. BERRY
David W. Berry
CHAIRMAN OF THE BOARD AND PRESIDENT
<PAGE>
FRONTIER NATURAL GAS CORPORATION
ONE ALLEN CENTER, SUITE 2920
HOUSTON, TEXAS 77002
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD
MAY 14, 1998
------------------------
Notice is hereby given that a special meeting of shareholders (the "Special
Meeting") of Frontier Natural Gas Corporation (the "Company"), will be held at
One Allen Center, Suite 2920, Houston, Texas 77002, at 9:00 A.M., Houston, Texas
time on May 14, 1998, to consider and act upon the following matters:
(1) A proposal to approve the Acquisition Agreement and Plan of Exchange
dated as of January 19, 1998, as amended (the "Acquisition Agreement"),
among the Company, Esenjay Petroleum Corporation ("Esenjay") and Aspect
Resources LLC ("Aspect"), pursuant to which the Company will acquire
certain assets from Esenjay and Aspect in exchange for shares of the
common stock, par value $.01 per share, of the Company (the "Common
Stock");
(2) A proposal to approve a recapitalization of the Company pursuant to
which each presently outstanding share of Common Stock will be converted
into 1/6th of a share of new common stock, par value $.01 per share, of
the Company (the "Reverse Split") with any resulting fractional interests
being rounded up to the next whole share;
(3) A proposal to approve a plan and agreement of merger pursuant to which
the Company will reincorporate in the state of Delaware and change its
name to Esenjay Exploration, Inc. (the "Reincorporation");
(4) A proposal to elect seven directors contingent upon consummation of the
Acquisition Agreement; and
(5) To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 1, 1998, as
the record date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting. Only those shareholders of record on that date
will be entitled to notice of and to vote at the Special Meeting.
A complete list of the shareholders entitled to vote at the Special Meeting
will be open for inspection at the Company's offices, One Allen Center, Suite
2920, Houston, Texas 77002, during normal business hours by any holder of Common
Stock, for any purpose germane to the Special Meeting, for a period of ten days
before the Special Meeting.
Your participation in the Company's affairs is important. To insure your
representation, whether or not you expect to be present at the Special Meeting,
please sign and date the enclosed proxy and return it promptly in the enclosed
postage prepaid envelope that has been provided for your convenience.
Shareholders who attend the Special Meeting may revoke their proxies and vote in
person if they so desire.
By Order of the Board of Directors
/s/ DAVID B. CHRISTOFFERSON
David B. Christofferson
SECRETARY
Houston, Texas
April 24, 1998
<PAGE>
FRONTIER NATURAL GAS CORPORATION
PROXY STATEMENT
------------------------
This Proxy Statement is being furnished to shareholders of Frontier Natural
Gas Corporation, an Oklahoma corporation (the "Company"), in connection with the
solicitation of proxies by its Board of Directors for use at a special meeting
of shareholders (the "Special Meeting") to be held at One Allen Center, Suite
2920, Houston, Texas 77002, at 9:00 A.M., Houston, Texas time on May 14, 1998,
and any adjournment thereof.
At the Special Meeting, the Company's shareholders will be asked to consider
and act upon the following matters: (i) a proposal to approve the Acquisition
Agreement and Plan of Exchange dated as of January 19, 1998, as amended (the
"Acquisition Agreement"), among the Company, Esenjay Petroleum Corporation
("Esenjay") and Aspect Resources LLC ("Aspect"), pursuant to which the Company
will acquire certain assets from Esenjay and Aspect (the "Acquisitions") in
exchange for up to 60,640,199 shares of the common stock, par value $.01 per
share, of the Company (the "Common Stock"), consisting of up to 30,991,563
shares to Esenjay and up to 29,648,636 shares to Aspect or its assigns (after
giving effect to the Reverse Split described below, the total number of shares
of Common Stock to be issued in the Acquisitions will be 10,106,700, consisting
of up to 5,165,260 shares to be issued to Esenjay and up to 4,941,440 shares to
Aspect or its assigns); (ii) a proposal to approve a recapitalization of the
Company pursuant to which each presently outstanding share of Common Stock will
be converted into 1/6th of a share of new common stock, par value $.01 per
share, of the Company (the "Reverse Split"), with all fractional interests
created being rounded up to the next whole share; (iii) a proposal to approve a
plan and agreement of merger pursuant to which the Company will reincorporate in
the state of Delaware and will change its name to Esenjay Exploration, Inc. (the
"Reincorporation"); (iv) to elect seven directors contingent upon the
consummation of the Acquisition Agreement; and (v) to transact such other
business as may properly come before the Special Meeting or any adjournment
thereof.
A shareholder may revoke a proxy by: (i) delivering to the Company written
notice of revocation, (ii) delivering to the Company a proxy signed on a later
date or (iii) voting in person at the Special Meeting.
As of April 1, 1998, the Record Date for the determination of shareholders
entitled to vote at the Special Meeting, there were outstanding and entitled to
vote 9,935,906 shares of the Common Stock (before giving effect to the Reverse
Split). Each share of Common Stock entitles the holder to one vote on each
matter presented to the shareholders.
IN CONSIDERING WHETHER TO APPROVE THE ACQUISITION AGREEMENT, THE REVERSE
SPLIT AND THE REINCORPORATION, AND WHETHER TO VOTE FOR THE NOMINEES FOR DIRECTOR
SET FORTH HEREIN, SHAREHOLDERS SHOULD CAREFULLY EVALUATE THE MATTERS SET FORTH
UNDER "THE ACQUISITIONS," "THE REVERSE SPLIT," "THE REINCORPORATION," "ELECTION
OF DIRECTORS," AND "RISK FACTORS."
This Proxy Statement and the accompanying proxy are first being mailed to
the Company's shareholders on or about April 24, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Facilities maintained by the Commission at its principal offices at
450 Fifth Street, N.W., Washington, D.C. 20549, and its regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048, and the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Such
information also may be obtained on the Internet through the Commission's EDGAR
database at HTTP://WWW.SEC.GOV.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Proxy Statement contains certain statements that are "Forward Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Exchange Act. Those
statements include, among other things, the discussions of the Company's
business strategy and expectations concerning market position, future
operations, funding plans, margins, profitability, liquidity and capital
resources. Generally, these statements relate to business plans or strategies,
projected or anticipated benefits or other consequences of such plans or
strategies, projected or anticipated benefits from acquisitions made by or to be
made by the Company (including the Acquisitions), or projections involving
anticipated revenues, expenses, earnings, levels of capital expenditures and
other aspects of operating results. Although the Company believes that the
expectations reflected in such Forward Looking Statements are reasonable, the
Company can give no assurance that such expectations will prove to be correct.
The Company's operations are subject to uncertainties, risks and other
influences, including the matters set forth herein under the caption "Risk
Factors," many of which are outside of the Company's control and any one of
which, or a combination of which, could materially adversely affect the results
of the Company's operations and whether the Forward Looking Statements prove to
be accurate. See "Risk Factors."
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... (i )
The Company............................................................. 2
The Special Meeting................................................... 3
The Acquisitions...................................................... 4
The Reverse Split..................................................... 8
The Reincorporation................................................... 8
The Election of Directors............................................. 9
Auditors.............................................................. 9
Other Matters......................................................... 9
Vote Required......................................................... 9
Recommendation of the Board of Directors................................ 9
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA........................... 10
RISK FACTORS.............................................................. 12
Risks Associated with Consummating the Acquisitions, the Reverse Split
and the Reincorporation............................................... 12
Risks Associated With Not Consummating the Acquisitions................. 13
Volatility of Oil and Gas Prices; Marketability of Production........... 13
Risk of Price Risk Management Transactions.............................. 14
History of Losses; Accumulated and Working Capital Deficits............. 14
Substantial Capital Requirements........................................ 14
Mortgaged Gas and Oil Properties; Credit Agreement Covenants and
Restrictions.......................................................... 15
Exploration Risks; Reliance on CAEX and 3-D Seismic Technology.......... 15
Uncertainty of Estimates of Oil and Gas Reserves........................ 15
Reserve Replacement..................................................... 16
Operating Hazards and Uninsured Risks; Production Curtailments.......... 17
Governmental Regulation................................................. 17
Title Defects........................................................... 18
Competition for Gas and Oil Leases and Seismic Permits.................. 18
Competition............................................................. 18
Dividend Policy--Common Stock........................................... 18
Dependence on Key Personnel............................................. 19
Shares Eligible for Future Sale......................................... 19
Year 2000 Compliance.................................................... 19
Discretionary Issuance; Anti-takeover Provisions........................ 20
Limited Liability of Directors; Indemnification of Directors and
Officers.............................................................. 20
THE MEETING............................................................... 21
Date, Time and Place.................................................... 21
Purposes of the Meeting................................................. 21
Votes Required.......................................................... 21
Voting of Proxies....................................................... 21
Revocability of Proxies................................................. 21
Record Date, Voting, Share Ownership and Quorum......................... 21
Solicitation of Proxies................................................. 22
THE ACQUISITIONS.......................................................... 23
General................................................................. 23
The Acquired Assets..................................................... 23
Background of the Acquisitions.......................................... 29
Reasons for the Acquisitions............................................ 32
Opinion of Cornerstone Ventures, L.P.................................... 33
Opinion of Gaines, Berland Inc.......................................... 35
Management Following the Acquisitions................................... 38
Restrictions on Resales by Affiliates................................... 39
Regulatory Approvals.................................................... 39
Certain Federal Income Tax Consequences................................. 39
Listing on the Nasdaq Small-Cap Market.................................. 40
Recommendation of the Board of Directors................................ 40
Vote Required For Approval.............................................. 40
THE ACQUISITION AGREEMENT................................................. 41
The Acquisitions........................................................ 41
Assumed Liabilities..................................................... 41
Non-Assignable Rights; Consents......................................... 42
Representations and Warranties.......................................... 42
Election of Directors and Executive Officers............................ 42
Certain Covenants and Agreements........................................ 42
Conduct of Business..................................................... 43
Non-Solicitation........................................................ 43
Financing Covenants..................................................... 44
Incentive Plan.......................................................... 44
Additional Obligations.................................................. 44
Other Agreements........................................................ 45
Conditions to the Acquisitions.......................................... 45
Termination............................................................. 46
Breakup Fee............................................................. 46
Indemnification......................................................... 46
PRO FORMA FINANCIAL STATEMENTS............................................ 47
Notes to Unaudited Pro Forma Statements of Operations and Balance
Sheet................................................................. 48
BUSINESS AND PROPERTIES................................................... 50
General................................................................. 50
<CAPTION>
PAGE
----
<S> <C>
CAEX Technology and 3-D Seismic......................................... 51
Exploration and Development............................................. 52
Acquisitions and Divestments............................................ 53
Hedging Activities and Marketing........................................ 53
Principal Areas of Operations........................................... 54
Gas and Oil Reserves.................................................... 54
Drilling Activity....................................................... 55
Productive Well Summary................................................. 55
Volumes, Prices and Production Costs.................................... 56
Leasehold Acreage....................................................... 56
Competition............................................................. 56
Regulation.............................................................. 57
Title to Properties..................................................... 60
Operating Hazards and Insurance......................................... 61
Facilities.............................................................. 61
Employees............................................................... 61
Legal Proceedings....................................................... 61
Market and Dividend Data................................................ 62
SELECTED FINANCIAL DATA................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 65
Overview................................................................ 65
Year 2000............................................................... 66
Comparison of 1997 to 1996.............................................. 66
Known and Anticipated Trends, Contingencies and Developments Impacting
Future Operating Results.............................................. 67
Liquidity and Capital Resources......................................... 68
MANAGEMENT................................................................ 70
Directors and Executive Officers........................................ 70
Board and Committee Meetings............................................ 71
Director Compensation................................................... 71
Executive Officers...................................................... 71
Security Ownership...................................................... 71
Executive Compensation.................................................. 73
Option Grants........................................................... 74
Option Repricings....................................................... 74
Option Exercise and Year-End Values..................................... 75
Employment Agreements................................................... 76
Deferred Compensation................................................... 76
Option Plans............................................................ 77
Certain Transactions.................................................... 77
Compliance with Section 16(a) of the Exchange Act....................... 77
ELECTION OF DIRECTORS..................................................... 78
Recommendation and Vote................................................. 80
THE REVERSE SPLIT......................................................... 81
General................................................................. 81
Reasons for the Reverse Split........................................... 81
Risks Associated with the Reverse Split................................. 82
Effect on Outstanding Convertible Securities............................ 82
Effects of the Reverse Split............................................ 82
Exchange of Stock Certificates.......................................... 83
Listing................................................................. 84
Vote and Recommendation................................................. 84
THE REINCORPORATION....................................................... 85
General................................................................. 85
No Changes in Business of the Company................................... 85
Reasons for the Reincorporation......................................... 85
Differences Between the Oklahoma and Delaware Corporation Laws.......... 86
Reasons for Name Change................................................. 88
Consummation of the Reincorporation..................................... 88
No Dissenters Rights.................................................... 88
Certificate Exchange.................................................... 88
Federal Income Tax Consequences......................................... 88
Accounting Treatment.................................................... 89
Transferability of and Market for Shares................................ 89
Vote and Recommendation................................................. 89
DESCRIPTION OF SECURITIES................................................. 90
Common Stock............................................................ 90
Preferred Stock......................................................... 90
LEGAL MATTERS............................................................. 90
EXPERTS................................................................... 90
INDEX TO FINANCIAL STATEMENTS............................................. F-1
APPENDIX A: Acquisition Agreement......................................... A-1
APPENDIX B: Opinion of Cornerstone Ventures, L.P.......................... B-1
APPENDIX C: Opinion of Gaines Berland, Inc................................ C-1
APPENDIX D: Opinion of Chamberlain, Hrdlicka, White, Williams & Martin.... D-1
APPENDIX E: Certificate of Amendment to the Certificate of Incorporation
of Frontier Natural Gas Corporaton............................ E-1
APPENDIX F: Plan and Agreement of Merger.................................. F-1
</TABLE>
ii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF
ALL MATERIAL FEATURES OF THE ACQUISITION AGREEMENT, THE REVERSE SPLIT, THE
REINCORPORATION AND THE ELECTION OF DIRECTORS, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS PROXY
STATEMENT AND THE APPENDICES HERETO. YOU ARE URGED TO READ THIS PROXY STATEMENT,
THE ACQUISITION AGREEMENT (WHICH IS ATTACHED HERETO AS APPENDIX A AND
INCORPORATED HEREIN BY REFERENCE) AND THE OTHER APPENDICES ATTACHED HERETO IN
THEIR ENTIRETY. UNLESS OTHERWISE INDICATED, INFORMATION REGARDING SHARES ISSUED
OR ISSUABLE SET FORTH IN THIS PROXY STATEMENT GIVES EFFECT TO THE REVERSE SPLIT.
THE COMPANY
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil reserves. The Company also has engaged in
the acquisition, production, development and marketing of natural gas and oil.
The Company's early growth was through acquisitions of natural gas reserves
principally in the mid-continent area of Arkansas, Kansas, Oklahoma and Texas.
In recent years, however, the Company's business activities have focused more on
exploration and related developmental drilling projects in southern Louisiana
and along the Gulf Coast of Alabama, Mississippi and Texas. The Company's
current business objective is to increase its reserves by drilling natural gas
and oil wells on prospects identified and developed through the use of well
correlations, Computer Aided Exploration ("CAEX") technologies and 3-D seismic
surveys.
On January 19, 1998, the Company entered into the Acquisition Agreement with
Esenjay and Aspect. Pursuant to and subject to the terms and conditions of the
Acquisition Agreement, the Company will purchase from Esenjay (the "Esenjay
Assets") and Aspect (the "Aspect Assets") certain undeveloped oil and gas
exploration projects in the onshore Gulf Coast area (the "Acquisitions"). The
Company will issue up to 5,165,260 shares of Common Stock to Esenjay in exchange
for the Esenjay Assets, and will issue up to 4,941,440 shares of Common Stock to
Aspect or its assigns in exchange for the Aspect Assets.
The Company will substantially increase the scope and diversity of its
portfolio of projects upon consummation of the Acquisitions. The acquired assets
include substantial working interests in 28 exploration projects located
primarily along the Texas Gulf Coast. Most of the projects have been, are being,
or will be enhanced with 3-D seismic data and CAEX technologies. The 3-D seismic
data acquired will, when complete, cover approximately 1,500 square miles and
will all have been shot and initially processed since November 1996. Cornerstone
Ventures, L.P. ("Cornerstone") has delivered a written opinion (the "Cornerstone
Opinion") to the Company's Board of Directors that estimates the fair market
value of the Esenjay Assets and the Aspect Assets to be $54.2 million. The full
text of the Cornerstone Opinion is attached to this Proxy Statement as Appendix
B. For a summary of the analysis performed by Cornerstone in connection with
rendering the Cornerstone Opinion, see "The Acquisitions--Opinion of Cornerstone
Ventures, L.P."
If the Acquisitions are consummated, the Company will have a significant
number of projects that have reached the initial drilling stage, and the Company
expects to spend over $25.0 million net to its interest in exploratory drilling
during the following 12 months on over 30 wells. Management believes the Company
then will represent a focused investment opportunity on a diverse array of
technology enhanced, 3-D seismic confirmed, ready to drill natural gas oriented
projects.
The Company's strategy will be to use 3-D seismic and CAEX technologies to
attempt to reduce the exploration risk on a significant spread of natural gas
oriented projects. The Company's focus will be on certain trends along the Texas
and Louisiana Gulf Coast that have a demonstrated history of prolific natural
gas production from excellent quality reservoir rocks and that have a profile
suitable, for the addition of value through seismic evaluations. The Company
believes such trends are prone to direct detection of hydrocarbons through the
use of 3-D seismic data. The objective will be to further reduce risk by
drilling at depths deep enough to discover sizable gas accumulations (generally
below 8,000 to 12,500 feet), but not so deep as to be highly exposed to the
greater mechanical risks and drilling costs incurred in
2
<PAGE>
the deep plays in the region. Unlike the Gulf of Mexico, where 3-D seismic data
typically are owned and licensed by many companies that compete intensely for
leases, the private right of ownership of onshore mineral rights makes it
possible for individual exploration companies to exclusively control the seismic
data they acquire in focused core areas. A significant element of the Company's
strategy will be to acquire substantial amounts of proprietary 3-D seismic data
and significant acreage positions in order to seek to achieve a dominant
position in its focused core areas. This strategy will be represented in its
project inventory if the Acquisitions are consummated.
Before consummation of the Acquisitions, the Company's most significant
project was its Starboard Project located in Terrebonne Parish, Louisiana, which
consists of mineral leases and options and a proprietary 3-D seismic survey over
the Lapeyrouse Field. The Starboard Project is comprised of a group of distinct
exploration prospects as well as proved undeveloped locations. The Company has
devoted over three years to this project. Project partners include Fina Oil and
Chemical Company and others, although the Company is the largest working
interest owner. Initial exploratory drilling based upon 3-D seismic and CAEX
analysis should begin by mid-1998. The consummation of the Acquisitions will
make the Company substantially less dependent upon the success or failure of the
Starboard Project, and spread its opportunities and risks over an array of
technology enhanced projects in a number of exploration trends.
In addition to the Acquisitions, and in conjunction with them, the Company
will hire most of Esenjay's employees, including Michael E. Johnson as president
and CEO. It also will revamp its Board of Directors with several additions,
including Alex Cranberg as its Vice-Chairman. The Company believes these
additions will significantly strengthen its technical resources and its overall
management.
The following table sets forth the number of shares of Common Stock and the
percentage of issued and outstanding Common Stock owned by the Company's public
shareholders, Esenjay and Aspect before and after the Acquisitions, after giving
effect to the Reverse Split.
<TABLE>
<CAPTION>
PRE-ACQUISITIONS POST-ACQUISITIONS
----------------------- ---------------------
NUMBER OF PERCENTAGE NUMBER OF PERCENT
SHARES(1) OF CLASS SHARES(1) OF CLASS
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Public Shareholders.......................... 1,165,985 100% 1,655,985 14.08%
Esenjay...................................... -- -- 5,165,260 43.91%
Aspect(2)(3)................................. -- -- 4,941,440 42.01%
</TABLE>
- ------------------------
(1) Assumes warrants, options and convertible securities to purchase an
aggregate of 1,916,185 shares of Common Stock have not been exercised or
converted. See "Risk Factors--Shares Eligible for Future Sale."
(2) Assumes that $3.8 million of liabilities to an unaffiliated party relating
to the Aspect Assets have not been converted into 675,000 shares of Common
Stock issuable to such party upon such conversion. If such conversion
occurs, Aspect will be issued 4,266,440 shares, or 36.27%, of the
post-Acquisitions Common Stock, and such third party will be issued 675,000,
or 5.7%, of the post-Acquisitions Common Stock. See "The
Acquisitions--Assumed Liabilities--Aspect."
(3) Includes a DE MINIMIS number of shares that may be issued to certain Aspect
employees who may contribute to the Company overriding royalty and working
interests they own in certain of the oil and gas interests included in the
Aspect Assets in exchange for Common Stock. See "The Acquisition
Agreement--Assumed Liabilities--Aspect."
THE SPECIAL MEETING
TIME, DATE AND PLACE. The Special Meeting is scheduled to be held at One
Allen Center, Suite 2920, Houston, Texas 77002, at 9:00 A.M., Houston, Texas
time on May 14, 1998.
PURPOSES OF THE SPECIAL MEETING. The purposes of the Special Meeting are to
(i) approve the Acquisition Agreement, (ii) approve the Reverse Split, (iii)
approve the Reincorporation, (iv) elect seven
3
<PAGE>
new directors contingent upon consummation of the Acquisition Agreement and (v)
transact such other business as may properly come before the Special Meeting or
any adjournment thereof.
QUORUM, RECORD DATE, VOTING AND SHARE OWNERSHIP. The presence at the
Special Meeting, in person or by proxy, of the holders of a majority of the
votes entitled to be cast will constitute a quorum for the transaction of
business at the Special Meeting.
Only holders of record of Common Stock at the close of business on April 1,
1998 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting and at any adjournments thereof. Each share of Common Stock is entitled
to one vote. On the Record Date there were outstanding and entitled to vote
9,935,906 shares of Common Stock before giving effect to the Reverse Split.
VOTING OF PROXIES. Shares of Common Stock represented by executed, written
proxies received at or before the Special Meeting, and which thereafter have not
been properly revoked, will be voted in accordance with the instructions
indicated therein. If no instructions are indicated, such proxies will be voted
for approval of the (i) Acquisition Agreement, (ii) Reverse Split, (iii)
Reincorporation, (iv) election of the nominees for directors named in this Proxy
Statement and (v) in the discretion of the proxy holder as to any other matter
that may properly come before the Special Meeting.
REVOCABILITY OF PROXIES. Any shareholder giving a proxy has the power to
revoke it at any time before it is exercised by delivering to the Secretary of
the Company at its principal executive office located at One Allen Center, Suite
2920, Houston, Texas 77002, a written notice of revocation or another duly
executed proxy bearing a later date. A shareholder also may revoke his proxy by
attending the Special Meeting and voting in person. Attendance at the Special
Meeting will not in and of itself constitute a revocation of proxy.
THE ACQUISITIONS
Capitalized terms used under this caption and not otherwise defined in this
Proxy Statement have the meanings set forth in the Acquisition Agreement.
THE ACQUIRED ASSETS. The Esenjay Assets and Aspect Assets include
substantial interests in 28 exploration projects located primarily along the
Texas Gulf Coast. Through December 31, 1997, Esenjay and Aspect had incurred
historical exploration and development costs of $15,563,458 on the Esenjay
Assets and the Aspect Assets. These costs include costs associated with
leasehold acquisitions, geological and geophysical analysis, delay rentals and
dry hole costs. Most of the projects have been, are being, or will be enhanced
with 3-D seismic data and CAEX technologies. The 3-D seismic data acquired will,
when complete, cover approximately 1,500 square miles. See "The
Acquisitions--The Acquired Assets."
The Effective Date of the Acquisitions is November 1, 1997. On the Effective
Date, none of the Esenjay Assets or Aspect Assets contained any producing
properties. Since the Effective Date, however, Esenjay and Aspect have drilled
or are drilling eight wells that will be for the Company's account if the
Acquisitions are consummated. Of these wells, four have been completed or are
awaiting completion; one has encountered pays which are behind pipe while deeper
zones are being penetrated; two wells are still drilling; and one well was a dry
hole.
EFFECT OF THE ACQUISITIONS. Esenjay will transfer the Esenjay Assets to the
Company in exchange for up to 5,165,260 shares of Common Stock, and Aspect or
its affiliates will transfer the Aspect Assets to the Company in exchange for up
to 4,941,440 shares of Common Stock. The Esenjay Assets and Aspect Assets shall
be free and clear of all liabilities, obligations, or Liens whatsoever, except
for (i) Permitted Encumbrances and (ii) certain liabilities to be assumed by the
Company.
The Acquisitions are intended to qualify as tax-free exchanges under Section
351 of the Internal Revenue Code. See "The Acquisitions--Certain Federal Income
Tax Consequences." After consummation of the Acquisitions, the Company will
continue its operations under the name Esenjay Exploration, Inc. The Effective
Date of the Acquisitions is November 1, 1997.
4
<PAGE>
ASSUMED LIABILITIES--ESENJAY. The Esenjay Assets will be conveyed to the
Company subject to liabilities to unrelated third parties in the net amount of
$1.0 million. The Company will assume and discharge such debts. The Company will
assume Esenjay's obligations (i) under certain lease agreements (relating to
Esenjay's office space and certain office equipment) and maintenance contracts
and (ii) for accrued vacations and sick leave for those Esenjay employees who
accept employment with the Company. See "The Acquisition Agreement--Assumed
Liabilities--Esenjay."
In addition, the Company will assume and pay post-Effective Date liabilities
for operating costs ("Post Effective Date Costs") incurred by or for Esenjay's
account with respect to the Esenjay Assets. To the extent that Esenjay has paid
any Post Effective Date Costs on or before the Closing Date, the Company will
reimburse Esenjay for such costs no later than 180 days from the Closing Date or
10 days from the Company's receipt of funds from any public offering of the
Company's equity securities. See "The Acquisitions--Assumed
Liabilities--Esenjay."
ASSUMED LIABILITIES--ASPECT. The Company will assume and pay Post Effective
Date Costs with respect to certain of the Aspect Assets incurred by or for the
account of Aspect. The Company also will assume and pay Post Effective Date
Costs in excess of certain defined amounts to be paid by Aspect with respect to
the remaining Aspect Assets. To the extent that Aspect has paid any Post
Effective Date Costs in excess of such defined amounts on or before the Closing
Date, the Company will reimburse Aspect for such costs no later that 180 days
from the Closing Date or 10 days from the Company's receipt of funds from any
public offering of the Company's equity securities. See "The
Acquisitions--Assumed Liabilities--Aspect."
At Aspect's option and subject to the mutual agreement of the parties, the
Aspect Assets shall be subject to a $3.8 million liability to Joint Energy
Development Investments Limited Partnership ("JEDI"), a limited partnership in
which an affiliate of Enron Corporation serves as general partner. In such
event, the Company shall assume and discharge such debt, and the Company and
JEDI will enter into an Exchange Agreement pursuant to which JEDI will agree to
convert such debt into 675,000 shares of Common Stock. Therefore, if the Aspect
Assets are encumbered by such debt as of the Closing Date, such debt will be
assumed by the Company and extinguished by issuing to JEDI 675,000 shares of
Common Stock and by decreasing the number of shares of Common Stock issuable to
Aspect in the Acquisitions by 675,000. See "The Acquisition Agreement--Assumed
Liabilities--Aspect."
With the prior written consent of the Company and Esenjay, Aspect shall be
permitted to sell certain of the Aspect Assets before the Closing Date. In such
event, at the Closing, Aspect shall pay to the Company the net proceeds from any
such sales of the Aspect Assets. See "The Acquisition Agreement-- Assumed
Liabilities--Aspect."
REPRESENTATIONS AND WARRANTIES. The Company, Esenjay and Aspect each made
customary representations and warranties as to, among other things, their
respective corporate or limited liability company power and organizations and
compliance with law, their respective capitalizations, the authority and
validity of the Acquisition Agreement, required approvals, conflicts,
litigation, tax matters, environmental matters, and title to assets. See "The
Acquisition Agreement--Representations and Warranties."
POST-ACQUISITIONS MANAGEMENT. The Acquisition Agreement provides that the
following persons shall be nominated to the Company's Board of Directors and
shall be voted on at the Special Meeting to which this Proxy Statement relates:
(i) for a term expiring at the Company's annual shareholders meeting in 2000,
Alex M. Cranberg, Michael E. Johnson and Jack P. Randall (ii) for a term
expiring at the Company's annual shareholders meeting in 1999, Alex B. Campbell,
Charles J. Smith and David W. Berry and (iii) for a term expiring at the
Company's annual shareholders meeting in 1998, William D. Dodge III. In
addition, the Board intends to fill the vacancy in the Board of Directors
created by the recent death of an existing Board member with an independent
director who will be a member of the Audit and Compensation Committees, and an
additional vacancy with an Esenjay nominee, both for terms expiring at the
Company's annual shareholders meeting in 1998. The Acquisition Agreement also
provides that Mr. Berry shall be Chairman of the Board of Directors; Mr. Johnson
will be President and Chief Executive Officer;
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<PAGE>
Mr. Smith will be Chairman of the Executive Committee; Mr. Cranberg will be Vice
Chairman of the Board of Directors; Mr. Randall and Mr. Dodge will be members of
the Audit and Compensation Committees. David B. Christofferson shall be General
Counsel, Secretary and an executive officer of the Company. See "The Acquisition
Agreement--Election of Directors and Executive Officers."
Mr. Berry is the current Chairman of the Board and President of the Company.
Mr. Christofferson currently serves as Executive Vice President, Secretary,
General Counsel and a director of the Company. None of the other nominees for
director to be voted upon at the Special Meeting currently holds any position
with the Company.
REDEMPTION OF PREFERRED STOCK. The Company currently has outstanding 85,961
shares of convertible preferred stock (the "Preferred Stock"). The Company has
declared all accrued but unpaid quarterly dividends on the Preferred Stock. In
addition, the Acquisition Agreement requires the Company to call the Preferred
Stock for redemption before the Closing.
CONDUCT OF BUSINESS. The Acquisition Agreement requires that each party
conduct its respective business from the date of the Acquisition Agreement to
the Closing Date substantially as previously operated and only in the ordinary
course. The Company and Esenjay also are required to use their best efforts to
preserve intact their business organizations and relationships. Each party must
promptly notify the other parties of (i) the receipt by such party of any notice
or claim, written or oral, of default or breach by such party, or of any
modification, termination or cancellation, or threat of termination or
cancellation, of any relevant material agreement, (ii) any loss of, damage to,
or disposition of any of (a) such party's oil and gas interests and certain
other assets, in the case of Aspect and Esenjay, or (b) such party's oil and gas
interests that is reasonably likely to have a Material Adverse Effect on such
party, in the case of the Company, and (iii) after receipt of notice thereof by
the Company or Esenjay, of any claim or litigation threatened or instituted
against such party, or of any other event or circumstance that has or may have a
Material Adverse Effect on such party, or in the case of Aspect, after receipt
of notice thereof by Aspect of any claim or litigation threatened or instituted
against Aspect and relating to the Aspect Assets. Further, each of the Company
and Esenjay are prohibited, without the consent of the other parties to the
Acquisition Agreement, from entering into any single contract, commitment,
indebtedness or liability in excess of $50,000 and $100,000, respectively,
except that Esenjay's limitation applies only to the extent the ownership rights
in the Esenjay Assets are affected. See "Acquisition Agreement--Conduct of
Business."
NON-SOLICITATION. The Company may not solicit or initiate any proposals or
offers from any person relating to any acquisition or purchase of all or a
material amount of the assets of, or any securities of, or any merger,
consolidation or business combination with, the Company. The Board of Directors
may consider or negotiate an unsolicited bona fide Acquisition Proposal, and
under certain circumstances, accept a Superior Proposal. See "The Acquisition
Agreement--Non-Solicitation."
FINANCING COVENANTS. In connection with the Acquisition Agreement, Aspect
committed to lend to the Company up to $1.8 million (the "Initial Bridge
Facility"). The Company granted a mortgage on certain properties to secure the
financing provided by Aspect under the Initial Bridge Facility. Interest on the
Initial Bridge Facility was at a rate of 18% per annum. In exchange for such
commitment, Aspect received warrants to purchase 9,375 shares of Common Stock at
an exercise price of $3.00 per share. An affiliate of Gaines, Berland Inc., the
Company's financial advisor ("GBI"), participated in 37.5% of Aspect's
obligation to lend funds to the Company pursuant to the Initial Bridge Facility
and, in exchange for such participation, received warrants to purchase 9,375
shares of Common Stock at an exercise price of $3.00 per share. In addition,
Esenjay guaranteed up to 25.0% of the Company's payment obligations under the
Initial Bridge Facility and, in exchange for such guaranty, received warrants to
purchase 6,250 shares of Common Stock at an exercise price of $3.00 per share.
Pursuant to the terms of the Acquisition Agreement, the Company, Esenjay and
Aspect negotiated with Duke Energy Financial Services, Inc. ("DEFS") for the
consummation of a new credit facility (the "New Credit Facility") that allows
for advances by DEFS of up to $7.8 million. Outstanding principal amounts under
the New Credit Facility bear interest at the rate of prime plus 4%. In addition,
the lender
6
<PAGE>
will receive cash payments equal to an overriding royalty of 0.6% of the
Company's interest in wells the Company drills while the New Credit Facility is
outstanding, and the lender has the right to gather, process, transport and
market, at competitive market rates, natural gas produced from a majority of the
projects the Company intends to acquire pursuant to the Acquisitions. On July
31, 1999, all amounts due under the New Credit Facility will be converted into a
term loan bearing interest at the rate of prime plus 4% and payable in twelve
monthly installments, the first eleven of which shall be equal to 1/30th of the
principal outstanding on July 31, 1999 plus interest, and a final monthly
payment of all remaining principal, plus interest. The proceeds from the New
Credit Facility were used to repay the Initial Bridge Facility and to finance
certain exploration and 3-D seismic costs, leasehold acquisitions, development
of oil and gas properties and general corporate purposes. In exchange for
guaranteeing the indebtedness under the New Credit Facility, Aspect, GBI and
Esenjay received warrants to purchase 9,375, 9,375 and 6,250 shares of Common
Stock, respectively, each at an exercise price of $3.00 per share. See "The
Acquisition Agreement--Financing Covenants."
After the Closing, the Company intends to evaluate additional financing
alternatives, which may include accessing the public equity markets.
INCENTIVE PLAN. At or before Closing, the Company is required to adopt a
long-term incentive plan for its officers, directors, employees and consultants
that is mutually acceptable to the Company, Esenjay and Aspect (the "Option
Plan"), which shall provide for grants of stock and stock-oriented awards in an
amount of up to 15% of the shares of the outstanding Common Stock after giving
effect to the Acquisitions, any currently outstanding options and the Reverse
Split. Shareholders' approval of the Option Plan will be sought at the Company's
next annual shareholders meeting following the Closing. See "The Acquisition
Agreement--Incentive Plan."
OPINION OF CORNERSTONE VENTURES, L.P. Cornerstone has delivered an opinion
to the Company stating that the fair market value of the Esenjay Assets and the
Aspect Assets is approximately $54.2 million. For purposes of such opinion,
Cornerstone defined "fair market value" as the price in cash at which a property
would change hands between a willing buyer and a willing seller, with neither
party acting under compulsion, and both parties having reasonable knowledge of
relevant facts.
OPINION OF FINANCIAL ADVISOR. GBI has delivered a written opinion to the
Board of Directors that the receipt of the Esenjay Assets and the Aspect Assets
in consideration of the Common Stock to be issued in the Acquisitions is fair to
the Company's shareholders from a financial point of view. The full text of
GBI's opinion is attached to this Proxy Statement as Appendix C. For a summary
of the analysis GBI performed in connection with rendering its opinion, see "The
Acquisitions--Opinion of Gaines, Berland, Inc."
CONDITIONS TO THE ACQUISITIONS. The obligations of the Company, Esenjay and
Aspect to consummate the Acquisitions and the related transactions are subject
to satisfaction or waiver of certain conditions on or before the Closing Date,
including (i) the representations and warranties of each party must be true in
all material respects as of the Closing Date, and the parties must have complied
in all respects with their respective covenants set forth in the Acquisition
Agreement; (ii) the delivery of customary opinions of counsel, including a tax
opinion; (iii) the Acquisition Agreement must be approved by the requisite
outstanding number of shares of Common Stock; (iv) there shall not have occurred
any Material Adverse Effect with respect to the Company, Esenjay or Aspect; (v)
Bank of America Illinois (the Company's lender of the Starboard Project) shall
have consented to the Acquisitions; (vi) all of the issued and outstanding
Preferred Stock shall have been called for redemption and (vii) the GBI fairness
opinion shall have been delivered to the Company. See "The Acquisition
Agreement--Conditions to the Acquisitions."
TERMINATION. The Acquisition Agreement may be terminated at any time before
the Closing (i) by the mutual written consent of each of the Company, Esenjay
and Aspect; (ii) if there has been a material breach by a party of any
representation or warranty in the Acquisition Agreement, or if, on the Closing
Date, any condition to Closing has not been satisfied; (iii) if the Closing
fails to occur by June 30, 1998; or (iv) by the Company if it receives a
Superior Proposal. See "The Acquisition Agreement--Termination."
7
<PAGE>
BREAKUP FEE. If the Acquisition Agreement is terminated (i) by any party
due to the failure of the Company's shareholders to approve the Acquisition
Agreement or (ii) by the Company if it receives a Superior Proposal, then Aspect
and Esenjay shall be entitled to receive from the Company a fee equal to the sum
of all out-of-pocket expenses and fees (including fees and expenses of counsel,
accountants, experts and consultants) actually incurred or accrued by Aspect or
Esenjay in connection with the Acquisition Agreement. In addition, Aspect and
Esenjay each shall be entitled to an assignment of 10% of the Company's interest
in the Starboard Project. See "The Acquisition Agreement--Breakup Fee" and
"Business and Properties--Exploration and Development."
INDEMNIFICATION. Each party shall indemnify, defend and hold the other
parties harmless from and against any and all losses, liabilities, damages,
obligations, costs and expenses (including legal and other similar expenses)
from, resulting by reason of, or arising in connection with a breach of a
representation or warranty in the Acquisition Agreement, a failure to perform
any obligations under the Acquisition Agreement and for certain other matters.
See "The Acquisition Agreement--Indemnification."
RISK FACTORS. Consummation of the Acquisitions involves certain risks that
the Company's shareholders should consider in determining whether to vote for
approval of the Acquisition Agreement. See "Risk Factors."
THE REVERSE SPLIT
Pursuant to the Reverse Split, each presently outstanding share of Common
Stock ("Old Stock") will be converted automatically and without further action
by the Shareholders upon effectiveness of the Reverse Split into 1/6th of a
share of new common stock, par value $.01 per share, of the Company, as so
recapitalized ("New Stock"). Any fractional interests resulting from the Reverse
Split will be rounded up to the nearest whole share of New Stock. Upon
consummation of the Reverse Split, the number of shares of Common Stock issuable
and the exercise price of the Company's outstanding warrants and options will be
adjusted at the same ratio as the Reverse Split.
The Board of Directors believes that a reduction in the number of issued and
outstanding shares of Common Stock may increase the market price for the Common
Stock. Such a market price increase is important because the bid price for the
Company's Common Stock currently does not meet the minimum requirements for
continued listing on the Nasdaq Small-Cap Market. Unless such bid price is
increased, a risk exists that the Common Stock could be removed from trading on
the Nasdaq Small-Cap Market. Such removal would reduce the liquidity of the
Common Stock, and would likely have a material adverse effect on the ability of
shareholders to sell their Common Stock and on the price at which the Common
Stock could be sold. In addition, if the Reverse Split is not approved, the
Company will not have sufficient shares available for issuance pursuant to the
Acquisitions. Therefore, approval of the Reverse Split is required for
consummation of the Acquisitions. See "The Reverse Split."
If approved, the Reverse Split will take effect even if the Acquisition
Agreement and the Reincorporation are not approved and even if the nominees for
directors set forth herein are not elected.
THE REINCORPORATION
REINCORPORATION IN DELAWARE. The Board of Directors has proposed to change
the Company's state of incorporation from Oklahoma to Delaware because Delaware
is the leading forum state for incorporations in the United States and has the
most extensive and well developed body of corporate law of any state. The Board
also has proposed to change the Company's name to Esenjay Exploration, Inc. See
"The Reincorporation" and "Risk Factors--Risks Associated With Consummation of
the Acquisitions, the Reverse Split and the Reincorporation--Risks of Approving
the Reincorporation."
NO DISSENTER'S RIGHTS. Under Oklahoma law, Company shareholders who might
otherwise wish to do so will not have the right to dissent from the
Reincorporation and receive an agreed or judicially appraised value for their
shares.
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<PAGE>
THE ELECTION OF DIRECTORS
Seven persons have been nominated for election as directors at the Special
Meeting to hold office until their terms of office expire. The Company's Board
of Directors is divided into three classes. Three of the nominees will be
elected to a term expiring at the Company's annual shareholders meeting in 2000,
three of the nominees' terms will expire at the Company's annual shareholders
meeting in 1999, and one nominee's term will expire at the Company's annual
shareholders meeting in 1998. Information with respect to each nominee is set
forth under the caption "Election of Directors--Nominees." The nominees for
directors listed in this Proxy Statement shall be elected only if they receive
the requisite votes at the Special Meeting and only if the Acquisition Agreement
and the Reverse Split are approved. If the Acquisition Agreement and the Reverse
Split are not approved, the nominees set forth herein will not be elected, and
the Company's current directors will remain in office until the expiration of
their respective terms.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, ("Deloitte & Touche"), has served as the Company's
independent auditor for several years. A representative of Deloitte & Touche
plans to attend the Special Meeting and will be available to answer appropriate
questions. The representative also will have an opportunity to make a statement
at the Special Meeting, although the Company does not expect that any statement
will be made.
OTHER MATTERS
The Board of Directors does not know of any other matters that may come
before the Special Meeting. However, if any other matters are properly presented
to the Special Meeting, the persons named in the accompanying proxy intend to
vote, or otherwise act, in accordance with their best judgment on such matters.
VOTE REQUIRED
Approval of the Reverse Split and the Reincorporation requires the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock. Approval of the Acquisition Agreement requires the affirmative
vote of the holders of a majority of the shares present at the Special Meeting.
The seven nominees for election as directors who receive the greatest number of
votes for election at the Special Meeting will be elected as directors to serve
for the terms set forth under "Election of Directors."
Since the proposals to adopt the Reverse Split and the Reincorporation
require the affirmative vote of a majority of the shares entitled to vote, as
opposed to a percentage of the issued and outstanding shares entitled to vote
that are present at the Special Meeting, the failure to vote in person or by
proxy, as well as any abstention from voting, will have the same effect as a
vote against the Reverse Split and the Reincorporation, and thus, as a vote
against the Acquisition Agreement, since approval of the Reverse Split is
required to consummate the Acquisitions. However, if approved, the Reverse Split
will take effect even if the Acquisition Agreement and the Reincorporation are
not approved, and even if the nominees for director set forth herein are not
elected. In addition, if the Acquisition Agreement and the Reverse Split are
approved, the directors elected at the Special Meeting will take office even if
the Reincorporation is not approved.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ACQUISITION
AGREEMENT, THE REVERSE SPLIT, THE REINCORPORATION AND THE ELECTION OF THE SEVEN
NOMINEES FOR DIRECTORS, AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE IN
FAVOR OF THE ADOPTION OF EACH OF THESE PROPOSALS. MEMBERS OF MANAGEMENT WHO OWN
COMMON STOCK INTEND TO VOTE THEIR SHARES IN FAVOR OF EACH OF THESE PROPOSALS.
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<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The historical financial data for the years ended December 31, 1996 and 1997
are derived from the Company's audited financial statements. The pro forma
statement of operations data for the year ended December 31, 1997 combine the
Company's historical information as adjusted to give effect to the Acquisitions
as if they had occurred on January 1, 1997. Pro forma per share data gives
effect to the Reverse Split. Pro forma balance sheet data as of December 31,
1997 is presented as if the Acquisitions had been consummated on that date. The
statement of operations and balance sheet data are provided for comparative
purposes only and should be read in conjunction with the Company's historical
consolidated financial statements included elsewhere in this Proxy Statement.
The pro forma information presented is not necessarily indicative of the
combined financial results as they may be in the future or as they might have
been for the periods indicated had the Acquisitions been consummated as of
January 1, 1997.
<TABLE>
<CAPTION>
HISTORICAL DECEMBER 31, PRO FORMA
---------------------------- DECEMBER 31,
1996 1997 1997
------------- ------------- --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:(a) $ 3,166,792 $ 908,609 $ 908,609
Production and exploration costs(b).................................... 2,450,771 3,065,394 8,295,864
Depletion, depreciation & amortization(c).............................. 2,237,648 315,880 315,880
Impairment of oil and gas properties(d)................................ 51,000 349,384 349,384
Interest expense(e).................................................... 783,872 60,942 516,108
General and administrative expenses(f)................................. 2,217,099 2,070,812 3,553,812
Other expenses(g)...................................................... 451,421
------------- ------------- --------------
Net income (loss)...................................................... (5,025,019) (4,953,803) (12,122,439)
Cumulative preferred stock dividend.................................... 103,153 103,153
Redemption of preferred stock.......................................... 984,132
------------- ------------- --------------
Net loss applicable to common shareholders............................. $ (5,128,172) $ (5,056,956) $ (13,106,571)
------------- ------------- --------------
------------- ------------- --------------
Net loss per common and common stock equivalent........................ $ (0.72) $ (0.51) $ (0.71)
------------- ------------- --------------
------------- ------------- --------------
Weighted average shares (in thousands)................................. 7,142 9,878 18,388
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
FRONTIER
HISTORICAL PRO FORMA
-------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................................................ $ 690,576 $ 1,590,576
Working capital (deficit)........................................................... (476,251) (1,005,903)
Net properties and equipment........................................................ 3,144,370 59,363,120
Total assets...................................................................... 4,576,008 62,259,096
Current portion of long-term debt................................................... 401,085 1,382,088
Deferred gas revenues--current......................................................
Long-term debt...................................................................... 896,598 4,017,361
Deferred gas revenues--long-term....................................................
Common stock........................................................................ 860
Preferred stock..................................................................... 99,359 708,761
Paid-in capital..................................................................... 14,668,626 52,077,948
Retained earnings (deficit)......................................................... (12,936,862) 1,613,609
Total liabilities & equity........................................................ 4,576,008 62,259,096
</TABLE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS AND BALANCE SHEET DATA
(a) Revenues decreased from $3.2 million in 1996 to $.9 million in 1997
primarily as a result of ceased production from the Mobile Bay wells and
from the sale of producing properties.
(b) Pro forma exploration costs include geological and geophysical, delay
rentals and exploration costs of $5.2 million associated with the unproved
prospects contributed by Aspect and Esenjay.
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<PAGE>
(c) Depletion, Depreciation and Amortization expense decreased from $2.2 million
in 1996 to $.3 million in 1997 primarily due to the sale of certain oil and
gas properties.
(d) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
wells in the Mobile Bay prospect.
(e) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997. Pro forma interest included interest associated with the New Energy
Credit Facility of $442,179 and the Esenjay note payable to Aspect of
$12,987 assumed by the Company.
(f) Pro forma general and administrative expenses include historical expense of
Esenjay in the amount of $1,483,000 that would become part of the Company as
a result of the Acquisitions.
(g) 1996 included other expense items for the purchase and settlements of
deferred gas contracts. There were no such expenses during 1997.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for additional discussion regarding comparative operating
results for 1996 and 1997.
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<PAGE>
RISK FACTORS
THE FOLLOWING SHOULD BE CONSIDERED CAREFULLY WITH THE INFORMATION PROVIDED
ELSEWHERE IN THIS PROXY STATEMENT.
RISKS ASSOCIATED WITH CONSUMMATING THE ACQUISITIONS, THE REVERSE SPLIT AND THE
REINCORPORATION
PRINCIPAL SHAREHOLDERS. Upon consummation of the Acquisitions, Esenjay will
own approximately 44% and Aspect will own approximately 42% of the
then-outstanding Common Stock. As a result, each of Esenjay and Aspect will be
in a position to substantially influence the outcome of shareholder votes on the
election of directors and other matters. Moreover, Esenjay and Aspect together
will have sufficient voting power to control the approval of any matter brought
before the Company's shareholders. Esenjay and Aspect have not entered into any
agreement with respect to the voting of the shares of Common Stock they will own
after consummation of the Acquisitions. In addition, if Esenjay or Aspect were
to sell a significant number of their shares of Common Stock in the public
market, the prevailing market price of the Common Stock could be adversely
affected. See "--Shares Eligible for Future Sale".
INTERESTS OF MANAGEMENT. Certain of the Company's officers have interests
that may be different from the interests of other Company shareholders. Pursuant
to Incentive Agreements between the Company and Mr. Berry and Mr.
Christofferson, the Company agreed that if the Company closes a significant
corporate transaction, and if Mr. Berry or Mr. Christofferson, as the case may
be, does not resign as an executive officer before that time, the Company will
pay an incentive payment of $134,000 to Mr. Berry and $112,000 to Mr.
Christofferson. Such incentive payments are intended to reward such officers for
their services in soliciting, negotiating and closing a significant corporate
transaction. The transactions contemplated by the Acquisition Agreement will
constitute a significant corporate transaction pursuant to the Incentive
Agreements, and such incentive payments will be payable to Mr. Berry and Mr.
Christofferson if the Acquisitions are consummated. See "Management--Employment
Agreements."
UNCERTAINTY AS TO ESTIMATES OF FAIR MARKET VALUES. Cornerstone's estimates
of fair market values of the Esenjay Assets and the Aspect Assets do not purport
to be appraisals or necessarily reflect the prices at which such assets could
actually be sold. Because such estimates are inherently subject to uncertainty
and based upon numerous factors or events beyond the control of the parties to
the Acquisition Agreement or their respective advisors, no assurances can be
given that such estimates will prove to be accurate. See "The
Acquisitions--Opinion of Cornerstone Ventures, L.P."
MINORITY OWNERSHIP OF OIL AND GAS INTERESTS. Upon consummation of the
Acquisitions, the Company will own a minority interest in some of the projects
comprising the Esenjay Assets and Aspect Assets. Operational decisions, such as
the selection of drill sites, when to drill wells, the amount to be expended on
any well, determining whether to conduct recompletion or other activities, and
similar matters will be made by the operators of the wells on each project. The
interests of the operators of the wells and of the majority working interest
owners in many cases may not be aligned with the Company's interests. Therefore,
the Company may be unable to control many important aspects of the operation and
development of projects on which it owns a minority interest, and the
development of those projects may be conducted in a fashion that is adverse to
the Company's best interests.
RISKS OF APPROVING THE REVERSE SPLIT. Although the Company anticipates that
a reduction in the number of issued and outstanding shares of Common Stock
resulting from the Reverse Split may increase the market price for the Common
Stock, there can be no assurance that the six-for-one Reverse Split will result
in a trading price increase equal to six times the pre-Reverse Split trading
price. The failure of the market price of the Common Stock after the Reverse
Split to increase by the same percentage by which the number of shares of Common
Stock was reduced would have an adverse effect on the value of the shares of
Common Stock owned by the Company's current shareholders. There can be no
assurance that the Reverse Split will achieve the goal of increasing interest in
trading the Common Stock or promoting
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greater liquidity in the Company's Common Stock, or will permit the Company to
maintain minimum trading price requirements for continued listing on the Nasdaq
Small-Cap Market. See "The Reverse Split--Risks Associated with the Reverse
Split."
RISKS OF CONSUMMATING THE REORGANIZATION. Upon consummation of the
Reorganization, the Company will be governed by the corporate laws of the State
of Delaware and the rights of the Company's shareholders will no longer be
governed by Oklahoma law but instead will be governed by the law of Delaware.
See "The Reincorporation--Differences Between The Oklahoma And Delaware
Corporation Law" for a summary comparison of certain differences between the
rights of shareholders under Oklahoma law and the rights of shareholders under
Delaware law.
RISKS ASSOCIATED WITH NOT CONSUMMATING THE ACQUISITIONS
NEW CREDIT FACILITY. The New Credit Facility is intended to supply a
portion of the Company's capital needs for the Starboard Project and other
activities pending consummation of the Acquisitions. If the Acquisitions are not
consummated, the Company still will be required to repay up to $1.8 million of
indebtedness under the New Credit Facility, however, the Company may not have
cash from operations sufficient to satisfy such obligation. In addition, the
Company will be required to seek other sources of capital to pay the costs of
developing the Starboard Project. Such sources of capital will be more difficult
for the Company to access if the Acquisition Agreement is not approved.
Therefore, if the Acquisition Agreement is not approved, the Company can give no
assurance that it will have the sources of capital necessary to continue
operations in accordance with its current business plan.
ACCESS TO CAPITAL MARKETS. The Acquisitions are expected to significantly
improve the Company's access to capital markets, including both debt and equity
financing markets. If the Acquisitions are not consummated, the Company will be
required to pursue alternative sources of capital, which, if available, could
result in increased financial leverage or shareholder dilution. If such
alternative capital is not available on acceptable terms, the Company's ability
to expand its exploration activities and conduct its drilling program would be
severely constrained.
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms also is
substantially dependent upon oil and gas prices. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
are beyond the Company's control. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies.
There can be no assurance that current price levels will be sustained. It is
impossible to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices may adversely affect the
Company's financial condition, liquidity and results of operations and may
reduce the amount of the Company's oil and natural gas that can be produced
economically. Market prices for gas have generally declined since December 1997.
Additionally, substantially all of the Company's sales of oil and natural gas
are made in the spot market or pursuant to contracts based on spot market prices
and not pursuant to long-term fixed price contracts. With the objective of
reducing price risk, the Company enters into hedging transactions with respect
to a portion of its expected future production. There can be no assurance,
however, that such hedging transactions will reduce risk or mitigate the effect
of any substantial or extended decline in oil or natural gas prices. Any
substantial or extended decline in the prices of oil or natural gas would have a
material adverse effect on the Company's financial condition and results of
operations.
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In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Business and
Properties--Marketing."
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such values. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploration projects.
RISK OF PRICE RISK MANAGEMENT TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and natural gas price risk management arrangements with respect to a
portion of its expected production. These arrangements may include futures
contracts on the New York Mercantile Exchange ("NYMEX"), fixed price delivery
contracts and financial swaps. While intended to reduce the effects of
volatility of the price of oil and natural gas, such transactions may limit
potential gains by the Company if oil and natural gas prices were to rise
substantially over the price established by the arrangement. In addition, such
transactions may expose the Company to the risk of financial loss in certain
circumstances, including instances in which (i) production is less than
expected; (ii) if there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the
arrangement; (iii) the counter parties to the Company's future contracts fail to
perform under the contract; or (iv) a sudden, unexpected event materially
impacts oil or natural gas prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS
For the years ended December 31, 1996 and 1997, the Company had net losses
of $5,025,019 and $4,953,803. The Company anticipates that it will continue to
have net losses, until it acquires or develops enough additional gas and oil
properties to achieve profitability. There can be no assurance that the Company
will be able to do so.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has made and intends to make substantial capital expenditures in
connection with the exploration and development of its gas and oil properties.
Historically, the Company has funded its capital expenditures through a
combination of internally generated funds, equity and long-term debt financing,
and short-term financing arrangements. Based on its current operations, and
assuming the Acquisitions are approved and completed, the Company anticipates
that its capital expenditures through the end of 1998 will be derived from (i)
proceeds from the the New Credit Facility; (ii) the availability of credit under
the Company's credit facility with Bank of America Illinois (the "Credit
Agreement"); (iii) the proceeds of any equity financing the Company completes in
1998; (iv) other sources of mezzanine financing from industry participants; and
(v) the sale of interests in the Esenjay Assets and the Aspect Assets to
unaffiliated third parties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity of Capital Resources."
There can be no assurance that the Company will be successful in completing an
equity financing, and no assurance can be given that funds available under the
New Credit Facility and the Credit Agreement will be sufficient for the Company
to carry out its proposed plans. Future cash flows and the availability of
credit under the Credit Agreement and the New Credit Facility or
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any mezzanine financing, if obtained, will be subject to several variables, such
as the level of production from existing wells, prices of gas and oil and the
Company's success in locating and producing new reserves. If funds are not
available under the Credit Agreement and the New Credit Facility or any
mezzanine financing, and if the Company does not complete an equity financing in
1998, then the Company may sell interests in the Esenjay Assets and Aspect
Assets to fund its operations.
MORTGAGED GAS AND OIL PROPERTIES; CREDIT AGREEMENT COVENANTS AND RESTRICTIONS
The Company has granted to Bank of America Illinois a mortgage on
substantially all of the Company's proved developed gas and oil properties to
secure repayment under the Credit Agreement. In addition, upon consummation of
the Acquisitions, the Company is required to grant a mortgage to Duke Energy
Financial Services, Inc. on substantially all of the Esenjay Assets and Aspect
Assets to secure repayment under the New Credit Facility. The party providing
financing for the Starboard Project has been granted an overriding royalty
interest in the Starboard Project properties. Repayment of amounts owed are
payable only from the proceeds of the overriding royalty interest, but such
payments are secured by a mortgage on the Starboard Project properties. These
liens limit the Company's ability to borrow additional funds. The amount of
borrowings under the Credit Agreement is based on the maintenance of adequate
natural gas and oil reserves to support the amount borrowed. Should the
estimated proved natural gas and oil reserves or the price to be received for
these reserves decline below the required reserve value, the Company would be
required either to accelerate payment, repay a specified amount of the
borrowings so as to have adequate reserve value to support the borrowing, or
provide additional collateral for the loans. A failure by the Company to comply
with the covenants and restrictions contained in either the Credit Agreement or
the New Credit Facility, or obtain a waiver to such covenants and restrictions,
will constitute a default under the terms of the Credit Agreement, the New
Credit Facility and the Starboard Project financing, resulting in the
indebtedness all of those credit arrangements becoming immediately due and
payable and enabling the lenders to foreclose against the collateral for the
loans. The Company historically has not been, and currently is not, in
compliance with all its covenants under the Credit Agreement, but has secured
waivers of default for past noncompliance and expects that waivers will continue
to be granted in the future. The Company believes, but cannot assure, that it
will be able to continue to make the payments required by the Credit Agreement
and the New Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
EXPLORATION RISKS; RELIANCE ON CAEX AND 3-D SEISMIC TECHNOLOGY
The Company's principal activity has changed from the acquisition,
production and marketing of natural gas and oil reserves to exploration and
development activities. Exploratory drilling is a speculative activity and there
can be no assurance as to the success of the Company's drilling program. The
Company's strategy for discovering natural gas and oil reserves is to use 3-D
seismic surveys and CAEX technology to accurately define detailed and complex
geologic features. These technologies require greater pre-drilling expenditures
than traditional drilling strategies. Even when fully used and properly
interpreted, 3-D seismic data and visualization techniques only assist
geoscientists in identifying subsurface structures and hydrocarbon indicators
and do not conclusively allow the interpreter to know if hydrocarbons will in
fact be present in such structures. The Company's recent exploration efforts
have not met expectations. The continued failure of the Company's exploration
activities would have a material adverse effect on the Company's future results
of operations and financial condition. To date, the Company has drilled 27
wells, of which 15 were productive. See "Business and Properties--Drilling
Activity."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Proxy Statement contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the
Company's estimates that rely upon various assumptions, including assumptions
required by the Commission as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and
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gas reserves is complex, requiring significant decisions and assumptions in the
evaluation of available geological, geophysical, engineering and economic data
for each reservoir. As a result, such estimates are inherently imprecise. Actual
future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves may vary substantially from the Company's estimates. Any significant
variance in these assumptions could materially affect the estimated quantity and
value of reserves set forth in this Proxy Statement. In addition, the Company's
proved reserves may be subject to downward or upward revision based upon
production history, results of future exploration and development, prevailing
oil and gas prices and other factors, many of which are beyond the Company's
control. Actual production, revenues, taxes, development expenditures and
operating expenses with respect to the Company's reserves will likely vary from
the estimates used, and such variances may be material.
Approximately 93.94% of the Company's total proved reserves at December 31,
1997 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in this Proxy Statement assumes that
substantial capital expenditures by the Company will be required to develop such
reserves. Although cost and reserve estimates attributable to the Company's oil
and gas reserves have been prepared in accordance with industry standards, no
assurance can be given that the estimated costs are accurate, that development
will occur as scheduled or that the results will be as estimated. See "Business
and Properties--Oil and Gas Reserves."
The present value of future net revenues referred to in this Proxy Statement
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
Commission requirements, the estimated future net cash flows from proved
reserves generally are based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by increases in consumption by gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with the development and production of oil and gas
properties. In addition, the 10% discount factor, which the Commission requires
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
or the oil and gas industry in general.
RESERVE REPLACEMENT
The Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Unless the Company replaces its estimated proved reserves (through development,
exploration or acquisition), the Company's proved reserves generally will
decline as they are produced.
Exploratory drilling and, to a lesser extent, development drilling involve a
high degree of risk that no commercial production will be obtained or that the
production will be insufficient to recover drilling and completion costs. The
costs of drilling, completing and operating wells are uncertain. The Company's
drilling operations may be curtailed, delayed or canceled as a result of
numerous factors, including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
Furthermore, completion of a well does not assure a profit on the investment or
a recovery of drilling, completion and operating costs.
The Company's current strategy includes increasing its reserve base through
acquisitions of leaseholds with drilling potential and by continuing to exploit
its existing properties. There can be no assurance, however, that the Company's
exploration and development projects will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at economically viable
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costs. Furthermore, while the Company's revenues may increase if prevailing oil
and gas prices increase significantly, the Company's finding costs for
additional reserves could also increase. For a discussion of the Company's
reserves, see "Business and Properties--Oil and Gas Reserves."
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to market its production. There can be
no assurance that new wells the Company drills will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry wells, but also
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. In addition, the
Company's properties may be susceptible to hydrocarbon drainage from production
by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations, and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, many of the Company's oil and gas operations are located in an
area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damage to facilities and possibly interrupt
production. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities. The Company cannot predict the continued availability of insurance
at premium levels that justify its purchase. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse effect on the
financial condition and results of operations of the Company.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
may be subject to production curtailments. The curtailments may vary from a few
days to several months. In most cases the Company will be provided only limited
notice as to when production will be curtailed and the duration of such
curtailments. The Company is currently not curtailed on any of its production.
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental regulations that change from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and unitization and pooling
of properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. In addition, the production, handling, storage, transportation
and disposal of oil and gas, by-products thereof and other substances and
materials produced or used in connection with oil and gas operations are subject
to regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. The Company also may
be subject to substantial clean-up costs for any toxic or hazardous substance
that may exist under any of its current properties or properties that it has
operated in the past. To date, expenditures related to complying with these laws
and for remediation of existing environmental contamination have not been
significant in relation to the results of operations of the Company.
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Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation. In addition,
the recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been proposed in
Congress form time to time that would reclassify certain crude oil and natural
gas exploration and production wastes as "hazardous wastes", which would make
the reclassified wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the Company's operating costs, as well as the oil and gas
industry in general. The Company could incur substantial costs to comply with
environmental laws and regulations, and the Company is unable to predict the
ultimate cost of compliance with these requirements or their effect on its
production. See "Business and Properties-- Regulation."
TITLE DEFECTS
Title to the Company's oil and gas leases, including those contained in the
Esenjay Assets and Aspect Assets, will not be examined until drill sites are
selected. Although title will be examined before drilling on a site commences,
as is customary in the industry, the Company does not intend to purchase title
insurance, and there can be no assurance that losses relating to any lease will
not result from title defects, defects in the assignment of leasehold rights or
prior encumbrances. See "Business and Properties--Title to Properties."
COMPETITION FOR GAS AND OIL LEASES AND SEISMIC PERMITS
Substantial competition exists for gas and oil leases and there can be no
assurance the Company will be able to acquire the gas and oil leases it seeks.
Similar competition exists for seismic permits without which 2-D and 3-D seismic
surveys cannot be conducted. There can be no assurance that the Company can
obtain the permits necessary to conduct seismic surveys it may desire to
conduct. The seismic permitting risk can be greater in the State of Louisiana,
where current law requires permits from owners of at least an undivided 80%
interest in each tract over which a seismic survey is proposed to be conducted.
See "Business and Properties--Competition."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major integrated and independent gas and oil companies for the
acquisition of desirable gas and oil properties and leases, for the equipment
and labor required to develop and operate such properties, and in the marketing
of natural gas to end-users. Many of these competitors have financial and other
resources substantially greater than those of the Company. In addition, many of
the Company's larger competitors may be better able to respond to factors that
affect the demand for oil and natural gas production, such as changes in
worldwide oil and natural gas prices and levels of production, the cost and
availability of alternative fuels and the application of government regulations.
The Company also competes in attracting and retaining technical personnel,
including geologists, geophysicists and other specialists. Although the Company
believes that the technical staff to be provided by Esenjay after consummation
of the Acquisitions will enhance the Company's professional staff, there can be
no assurance that the Company will be able to attract or retain technical
personnel in the future. See "Business and Properties--Competition."
DIVIDEND POLICY--COMMON STOCK
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying dividends in the near future. The Company is
restricted under the terms of the Credit Agreement from making distributions of
any type with respect to any class of its capital stock unless it meets certain
financial requirements (the "Restricted Payment Tests"), including the
maintenance of a current ratio of not less than 1.1:1 and maintenance of
tangible net worth in excess of $5,000,000, after giving effect to the proposed
distribution. The Company currently does not meet all of the Restricted Payment
Tests and,
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unless it receives a waiver from such tests, is restricted under the terms of
the Credit Agreement from making any dividend payments or other distribution
with respect to any class of its capital stock.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the performance of certain of its
executive officers. The Company has not entered into employment agreements with
these executive officers. There can be no assurance that the Company will be
able to enter into any such employment agreements or otherwise to retain such
officers.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 1, 1998, the Company had a total of 1,655,985 shares of Common
Stock outstanding after giving effect to the Reverse Split. Of these shares,
1,429,990 shares are freely transferable by persons other than affiliates, as
defined in regulations under the Securities Act, without restriction or further
registration under the Securities Act. The remaining 225,985 shares of Common
Stock outstanding are "Restricted Securities" within the meaning of Rule 144
under the Securities Act and may not be sold in the absence of registration
under the Securities Act, unless an exemption from registration is available,
including the exemption provided by Rule 144. Under Rule 144 as currently in
effect, all such shares are currently eligible for sale, subject to certain
volume limitations and restrictions on the manner of sale.
If the Acquisition Agreement is approved, the Company will issue up to
10,106,700 shares of Common Stock to Esenjay and Aspect or its assigns as
consideration for the Esenjay Assets and the Aspect Assets. Such shares, which
will constitute approximately 85.92% of all of the issued and outstanding Common
Stock, will be Restricted Securities. Esenjay and Aspect have registration
rights pursuant to which the Company will file a registration statement with
respect to the Common Stock to be issued in the Acquisitions. Such registration
statement is anticipated to be filed promptly after the Special Meeting.
Although Esenjay and Aspect will be able to resell the Common Stock issued to
them pursuant to the Acquisition Agreement upon the effectiveness of such
registration statement, both Esenjay and Aspect have indicated to the Company
that they have no present intention to do so.
Approximately 1,596,738 shares of Common Stock are issuable upon the
exercise of existing options and warrants or the conversion of convertible
securities. Of such shares, 50,000 are issuable on exercise of warrants with a
conversion price of $3.00 per share issued to Esenjay, Aspect and an affiliate
of GBI in connection with the Initial Bridge Facility and the New Credit
Facility. In addition (i) 28,620 shares are issuable upon conversion of the
Company's Preferred Stock, which will be called for redemption upon the closing
of the Acquisitions; (ii) 291,667 shares are issuable upon conversion of the
Company's Series A Warrants at a conversion price of $36.00 per share; (iii)
776,250 shares are issuable upon conversion of the Company's Series B Warrants
at a conversion price of $12.15 per share; (iv) 193,334 shares are issuable upon
exercise of warrants issued to underwriters in certain of the Company's previous
equity offerings at exercise prices ranging from $12.15 per share to $34.50 per
share; and (v) 150,000 shares are issuable upon the exercise of additional
outstanding warrants with exercise prices ranging from $8.82 to $24.00 per
share. All of such shares have been or will be registered for resale pursuant to
registration rights agreements.
The sale of a material number of the shares of Common Stock eligible for
resale without restriction in the public markets or that will be eligible for
resale without restriction upon registration pursuant to applicable registration
rights agreements could have a material adverse effect on the trading price of
the Company's Common Stock.
YEAR 2000 COMPLIANCE
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to
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identify other potential areas of risk and has begun addressing these in its
planning, purchasing and daily operations. The total costs of connecting all
internal systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, no estimates can be made as to the potential adverse impact resulting
from the failure of third party service providers and vendors to prepare for the
year 2000. However, if any interruptions occur, they may have a material adverse
effect on the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company's customers and
suppliers are or will be year 2000 compliant. The failure of the Company's
customers and suppliers to achieve year 2000 compliance could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
DISCRETIONARY ISSUANCE; ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of holders of the Common Stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company, which could have the effect of discouraging bids for the Company and,
thereby, prevent shareholders from receiving the maximum value for their shares.
Although the Company has no present intention to issue any preferred stock,
there can be no assurance that the Company will not do so in the future.
In addition to the provision for the issuance of preferred stock, the
Company's Certificate of Incorporation and Bylaws include several other
provisions that may have the effect of inhibiting a change of control of the
Company. These include a classified Board of Directors, no shareholder action by
written consent and advance notice requirements for shareholder proposals and
director nominations. These provisions may discourage a party from making a
tender offer for or otherwise attempting to obtain control of the Company.
Moreover, as an Oklahoma corporation, the Company is subject to the provisions
of the Oklahoma General Corporation Act that could make it difficult or tend to
discourage attempts to acquire the Company. The Oklahoma Takeover Disclosure Act
includes provisions that are intended to encourage persons considering
unsolicited tender offers or other unilateral takeover proposals to negotiate
with the Company's Board of Directors rather than pursue non-negotiated takeover
attempts. Similar provisions exist under the Delaware General Corporation Law,
and will be applicable to the Company if the Reincorporation is approved. See
"The Reincorporation--Differences Between Oklahoma and Delaware Corporation
Laws."
LIMITED LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as permitted by the OGCA,
eliminates in some circumstances the monetary liability of the Company's
Directors for breach of their fiduciary duty as directors. In those
circumstances the Company's Directors will not be liable to the Company or its
shareholders for breach of such duty. The Company's Certificate of Incorporation
also provides that the Company shall indemnify its Directors and officers to the
full extent permitted by the OGCA. Similar provisions will remain applicable to
the Company if the Reincorporation is approved and the Company reincorporates in
Delaware. See "The Reincorporation--Differences Between Oklahoma and Delaware
Corporation Laws."
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THE MEETING
DATE, TIME AND PLACE
The Special Meeting is scheduled to be held at One Allen Center, Suite 2920,
Houston, Texas 77002, at 9:00 A.M., Houston, Texas time, on May 14, 1998.
PURPOSES OF THE MEETING
The purposes of the Special Meeting are to (i) approve the Acquisition
Agreement, (ii) approve the Reverse Split, (iii) approve the Reincorporation,
(iv) elect seven new directors contingent upon consummation of the Acquisition
Agreement and (v) transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
VOTES REQUIRED
Approval of the Reverse Split and the Reincorporation requires the vote of a
majority of the issued and outstanding shares of the Company's Common Stock.
Approval of the Acquisition Agreement requires the affirmative vote of a
majority of the shares present at the Special Meeting. The election of directors
requires a vote of a plurality of the shares present and voting at the Special
Meeting.
Since the proposals to adopt the Reverse Split and the Reincorporation
require the affirmative vote of a majority of the shares entitled to vote, as
opposed to a percentage of the issued and outstanding shares entitled to vote
that are present at the Special Meeting, the failure to vote in person or by
proxy, as well as any abstention or broker non-vote, will have the same effect
as a vote against the Reverse Split and the Reincorporation and, thus, as a vote
against the Acquisition Agreement, since approval of the Reverse Split is
required to consummate the Acquisitions. However, if approved, the Reverse Split
will take effect even if the Acquisition Agreement and the Reincorporation are
not approved, and even if the nominees for director set forth herein are not
elected. In addition, if the Acquisition Agreement and the Reverse Split are
approved, the directors elected at the Special Meeting will take office even if
the Reincorporation is not approved.
VOTING OF PROXIES
Shares of Common Stock represented by executed, written proxies received at
or before the Special Meeting, and which thereafter have not been properly
revoked as described below, will be voted in accordance with the instructions
indicated thereon. If no instructions are indicated, such proxies will be voted
for approval of the (i) Acquisition Agreement, (ii) Reverse Split, (iii)
Reincorporation and (iv) election of the nominees for directors identified in
this Proxy Statement. The proxy holder will use his discretion as to any other
matters that may properly come before the Special Meeting.
REVOCABILITY OF PROXIES
Any shareholder giving a proxy has the power to revoke it at any time before
it is exercised, by delivering to the Secretary of the Company at its principal
executive office located at One Allen Center, Suite 2920, Houston, Texas 77002,
a written notice of revocation or other duly executed proxy bearing a later
date. A shareholder also may revoke his proxy by attending the Special Meeting
and voting in person. Attendance at the Special Meeting will not in and of
itself constitute a revocation of a proxy.
RECORD DATE, VOTING, SHARE OWNERSHIP AND QUORUM
Only holders of record of Common Stock at the close of business on April 1,
1998 (the "Record Date") are entitled to notice of and to vote at the Special
Meeting and at any adjournments thereof. Each share of Common Stock is entitled
to one vote. On the Record Date there were outstanding and entitled to vote
9,935,906 shares of Common Stock before giving effect to the Reverse Split.
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The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the votes entitled to be cast will constitute a quorum for the
transaction of business at the Special Meeting. A proxy, if received in time for
voting and not revoked, will be voted at the Special Meeting in accordance with
the instructions contained therein.
Votes cast at the Special Meeting will be tabulated by a duly appointed
inspector of election or by the chairman of the Special Meeting. The inspector
or the chairman will treat shares represented by a properly signed and returned
proxy as present at the Special Meeting for purposes of determining a quorum,
without regard to whether the proxy is marked as casting a vote or abstaining.
Likewise, the inspector or the chairman will treat shares represented by "broker
non-votes" as present for purposes of determining a quorum, although such shares
will not be voted on any matter for which the record holder of such shares lacks
authority to act. Broker non-votes are proxies with respect to shares held in
record name by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners of persons entitled to vote; (ii) the broker
or nominee does not have discretionary voting power under applicable national
securities exchange rules or the instrument under which it serves in such
capacity; or (iii) the record holder has indicated on the proxy card or has
otherwise notified the Company that it does not have authority to vote such
shares on that matter.
SOLICITATION OF PROXIES
The solicitation of proxies for the Special Meeting may be made in person or
by mail, telephone, telecopy or telegram. In addition, the Company's directors,
officers and employees may solicit proxies from shareholders by any of the
foregoing methods. The Company will bear the costs of soliciting proxies for the
Special Meeting.
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THE ACQUISITIONS
GENERAL
The Acquisition Agreement provides for the acquisition of the Esenjay Assets
and the Aspect Assets in exchange for up to 10,106,700 shares of Common Stock.
Upon consummation of the Acquisitions, Esenjay will own approximately 44% of the
post-closing outstanding Common Stock and Aspect (or its assigns) will own
approximately 42% of the post-closing outstanding Common Stock. The Acquisitions
are intended to qualify as tax-free exchanges under Section 351 of the Internal
Revenue Code. See "--Certain Federal Income Tax Consequences." After
consummation of the Acquisitions, the Company will continue its operations under
the name Esenjay Exploration, Inc.
THE ACQUIRED ASSETS
The Esenjay Assets and Aspect Assets include interests in 28 exploration
projects located primarily along the Texas Gulf Coast. Through December 31,
1997, Esenjay and Aspect had incurred historical exploration and development
costs of $15,563,458 on the Esenjay Assets and the Aspect Assets. These costs
include costs associated with leasehold acquisitions, geological and geophysical
analysis, delay rentals and dry hole costs. Most of the projects have been, are
being, or will be enhanced with 3-D seismic data and CAEX technologies. The 3-D
seismic data acquired will, when complete, cover approximately 1,500 square
miles. Cornerstone has delivered to the Company an opinion that estimates the
fair market value of the Esenjay Assets and the Aspect Assets to be
approximately $54.2 million. See "--Opinion of Cornerstone Ventures, L.P."
Set forth below is a description of the Esenjay Assets and the Aspect
Assets. The amounts specified for the interests in the projects and gross
acreage of each project in the descriptions set forth below were determined as
of the date of this Proxy Statement. The acreage figures are estimates only, due
to the ongoing daily process of acquiring, evaluating and releasing acreage.
Therefore, the acreage figures set forth below may not reflect the actual
acreage acquired upon closing of the Acquisitions. Acreage data and estimates of
drilling and completion costs set forth below are gross amounts and are not net
to the Company's interests in the related projects. In addition, predictions of
well costs are estimates only, and actual costs may vary based on down hole
conditions and costs for drilling rigs at the time of drilling, among other
factors. In prospects where 3-D seismic surveys are not yet shot, processed and
interpreted, such data may, when available, enhance or condemn previously
identified prospects or leads.
The Effective Date of the Acquisitions is November 1, 1997. On the Effective
Date, none of the Esenjay Assets or Aspect Assets contained any producing
properties. Since the Effective Date, however, Esenjay and Aspect have drilled
or are drilling eight wells that will be for the Company's account if the
Acquisitions are consummated. Of these wells, four have been completed or are
awaiting completion; one has encountered pays which are behind pipe while deeper
zones are being penetrated; two wells are still drilling; and one well was a dry
hole.
Many of the projects to be acquired in the Acquisitions have independent
third parties as working interest owners based upon who owns leases, who elects
to participate in drilling, industry trades and other factors. Of the interests
acquired from Esenjay and Aspect, Esenjay will deliver over 90% of its interests
to the Company and retain the balance, and Aspect will deliver interests ranging
from 50% to 75% in most of the remaining projects. Esenjay and Aspect will be
responsible for their pro rata costs attributable to their retained interests.
Esenjay Assets and Aspect Assets will constitute the Company's core
exploration areas, which are the Downdip Frio, Wilcox, and Texas Hackberry Core
Areas. Also included are Seed Projects (which are early stage exploration areas
that may develop into new core project areas) and Non Core Projects, which are
individual projects that are not presently expected to be further expanded.
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DOWNDIP FRIO CORE AREA PROJECTS
The Downdip Frio Core Area generally lies in the Middle Texas Gulf Coast
where the Company believes Frio targets exist at moderate depths. The Company
believes that the ability to seismically detect the presence of gas is likely in
a number of these projects, especially in the shallower portions of the Frio
section. Deeper high potential Vicksburg sands are possible targets in several
of the projects.
BIG GAS SAND PROJECT. The Company will acquire from Aspect a 22.5% interest
in this 3-D seismic project, which consists of approximately 24,700 gross acres
of leases and options in Galveston County, Texas. Portions of this acreage lie
within two miles of TransTexas Gas Corp.'s recent Vicksburg discovery that has
announced flowing test rates of 75 million cubic feet of gas and 11,000 bbls of
condensate per day. Fields in the area have produced over 700 Bcf of gas and 100
million bbls of oil. The primary geological areas the Company has identified for
potential drilling are the Frio and Vicksburg sands. An onshore seismic survey
is scheduled for mid-1998. The estimated cost to drill and complete a shallow
well is approximately $900,000 with deeper wells costing over $3.5 million.
BLESSING PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 24% interest in this project, which consists of approximately 10,000
gross acres of leases and options under 22 square miles of 3-D seismic coverage
in Matagorda County, Texas. Fields in the area have produced over 300 Bcf of gas
and 15 million bbls of oil. A 3-D seismic survey was conducted in conjunction
with the Tidehaven 3-D shoot. See "--Tidehaven Project". The Company has
generated several upper Frio prospect leads from this 3-D data set. An upper
Frio Sands well has been drilled in which the Company will own a working
interest if the Acquisitions are consummated. The deepest pay zone is currently
being flow tested at a rate exceeding two million cubic feet of gas and 35 bbls
of condensate per day. The Company believes other pay zones exist up-hole and
are behind pipe. Before drilling an additional interest was acquired in the
well, which will bring the Company's total interest in the well to 37.5%. The
estimated costs of drilling and completing a shallow well in this project area
are approximately $550,000. The costs of completing a deep well are
approximately $1.3 million.
TIDEHAVEN PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 40.5% interest in this project, which consists of leases and options
covering over 7,000 gross acres in Matagorda County, Texas. Fields in the area
have produced approximately 48 Bcf of gas and five million bbls of oil. The
Company believes the Tidehaven Field, which is inside the project area, has
multiple Frio potential pay sands down to 12,000 feet. A series of known field
pays and multiple fault blocks made this structure a 3-D seismic candidate.
Initial interpretation of the 28 square mile 3-D seismic data set is nearly
complete. Drilling has commenced on a well in which the Company will own a
working interest if the Acquisitions are consummated. The estimated costs of
drilling and completing wells in this project range from approximately $550,000
to $1.5 million, depending upon depth.
EL MATON PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 46.5% interest in this project, which consists of leases and options
covering approximately 10,000 gross acres in Matagorda County, Texas. Fields in
the area have produced over 50 Bcf of gas plus associated condensate. A 29
square mile 3-D seismic survey was started in late May 1997 as an extension of
the Tidehaven shoot. This seismic survey has been completed and is in the
interpretation phase. The geologic setting and target zones are the same as for
Tidehaven. The Company believes that the information obtained at Tidehaven will
benefit the El Maton project. Several prospect leads have been identified. The
estimated costs of drilling and completing a well in this project area are the
similar to that of Tidehaven.
MIDFIELD PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 37.5% interest in this project, which consists of leases and options
covering approximately 4,300 gross acres in Matagorda County, Texas. Fields in
the area have produced approximately 90 Bcf of gas and 10 million bbls of oil.
The project is an extension of the Tidehaven, Blessing and El Maton 3-D seismic
shoots. All four of these 3-D seismic surveys have been merged. The Midfield
Project is adjacent to, and up basin from, the El Maton
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Project. The geologic setting and target zones are similar to Tidehaven. Initial
data interpretation on a 21 square mile 3-D seismic survey over this acreage has
been disappointing for the zones that have historically been productive in the
area; however, the data has revealed two potential shallow drilling locations.
These locations require additional development before drilling can be scheduled.
The estimated cost of drilling and completing a well at these locations is
approximately $550,000.
MATAGORDA I PROJECT. The Company will acquire from Esenjay a 74% interest
in this project, which consists of approximately 9,500 gross acres of lease
options in Matagorda County, Texas. Four previously drilled shallow wells have
produced in excess of 850,000 bbls of oil within this acreage block. Review of
existing 2-D seismic data suggests to the Company that several undrilled fault
segments may exist. The Company believes that deeper sand objectives have not
been adequately tested. A 3-D seismic survey is scheduled for mid-year 1998 as
part of an adjacent project. See "--Matagorda II Project". The estimated cost to
drill and complete a shallow well in this project is approximately $550,000,
with deeper wells costing approximately $1.3 million.
MATAGORDA II PROJECT. The Company will acquire from Esenjay a 66% interest
in this project, which consists of approximately 7,500 gross acres of lease
options in Matagorda County, Texas. Fields in the project areas have produced
approximately 40 Bcf of gas and three million bbls of oil. A 1,000 acre wildcat
prospect for the entire package of Tex Miss sands. In addition, two
exploitation/development prospects have been generated within the project area
and are scheduled for a 3-D seismic survey mid-year 1998. The Matagorda II 3-D
seismic shoot will be completed in conjunction with the Matagorda I Project. The
estimated cost to drill and complete a shallow well is approximately $550,000
with deeper wells costing approximately $1.3 million.
SOUTHWEST PHEASANT PROJECT. The Company will acquire from Aspect a 75%
interest in this project, which consists of 10,000 gross acres of lease options
in Matagorda County, Texas. Fields in the area have produced approximately 70
Bcf of gas and 3.8 million bbls of oil. The primary target objectives are the
middle and lower Frio sands. A portion of the project area is covered by an old
Mobil 3-D seismic survey that has been reprocessed and reinterpreted. The
Company has identified several shallow prospects. Interpretation of deeper
formations is not yet complete. The estimated cost to drill and complete a
shallow well is approximately $550,000 with deeper wells costing approximately
$1.3 million.
GERONIMO PROJECT. The Company will acquire from Esenjay a 20% interest in
this project, which consists of approximately 6,700 gross acres of leases and
options in San Patricio County, Texas. Historical production from Frio sands
within the 3-D seismic survey area is over 300 Bcf of gas and 15 million barrels
of condensate. A 76 square mile 3-D seismic survey has been shot,and the Company
has identified several prospective drillsites, three of which have already been
drilled. The first two preceded the Acquisition Agreement and were drilled by
Esenjay. Both resulted in successful completions. The third well was drilled
after the effective date of the Acquisition Agreement and will be for the
Company's account if the Acquisitions are consummated. The well is currently
being completed in one of two potential pay sands, and is currently flowing at a
rate of approximately 60 bbls of oil and 120 Mcfgd. A deep Vicksburg test well
is currently scheduled to be drilled in 1998. The estimated cost of drilling and
completing wells in this project area is approximately $600,000 for a shallow
well and approximately $1.2 million for an intermediate depth well, with deeper
Vicksburg wells costing over $4 million.
HOUSTON ENDOWMENT PROJECT. The Company will acquire from Aspect and Esenjay
an aggregate 27% interest in this project, which consists of approximately
12,700 gross acres of leases and options in San Patricio and Aransas Counties,
Texas. The Company believes the leasehold has significant potential in many
zones, as approximately 20 reservoirs are productive along the trend. A 50
square mile 3-D seismic survey has been acquired. Esenjay drilled one dry hole
within the project area before execution of the Acquisition Agreement. The
Company believes the dry hole provided subsurface data that has set up an updip
location to be drilled. The Company plans to drill two wells within the project
area in 1998. One of the wells will be drilled to test the shallower sands. The
second well will test deeper formations.
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Additionally several shallow and deep prospects remain to be drilled. The
estimated cost of drilling and completing a shallow well in this project is
approximately $700,000, with deeper wells costing approximately $1.3 million.
WOLF POINT PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 45.5% interest in this project, which consists of approximately 1,200
gross acres of state leases in Calhoun County, Texas. Fields in the area have
produced approximately 35 Bcf of gas and six million bbls of oil. Esenjay
drilled and completed five successful wells within the 3-D seismic survey area
before the Effective Date of the Acquisitions. The prospects require directional
drilling. The Company believes this project has multiple Frio pay potential from
7,000 to 9,000 feet, all normally pressured. Known field pays from this area are
from the 7,200 foot Frio, 7,500 foot Frio, 7,700 foot Frio, Broughton, Oats,
Upper Middle and Lower Melbourne sands. Additional geophysical interpretation is
being conducted in an attempt to identify direct hydrocarbon indicators. The
Company has delineated several potential drill sites. The estimated cost to
drill and complete a well in this project area is approximately $900,000.
SHERIFF FIELD AREA PROJECT. The Company will acquire from Aspect a 75%
interest in this project, which consists of approximately 54,000 gross acres of
lease options in Calhoun County, Texas. The Company believes this area is
lightly explored for part of the Lower Frio and Vicksburg formations southwest
of Lavaca Bay. An independent oil company has offered to purchase this acreage
block, which has not yet been shot with 3-D seismic. This sale would net the
Company approximately $1.2 million if consummated.
WEST JEFFCO PROJECT. The Company will acquire from Aspect a 45% interest in
this project, which contains 13,500 gross acres of lease options in Jefferson
County, Texas. Fields in the area have produced approximately 30 Bcf of gas and
six million barrels of oil. Numerous prospect leads have been generated within
the area via log shows, detailed structural mapping and 2-D seismic data. Deep
exploration zones also are targeted. Before drilling, the Company plans to shoot
a 3-D seismic survey that is scheduled to start in the third quarter of 1998.
The estimated cost of drilling and completing a shallow well is approximately
$650,000 with deeper wells costing approximately $1.6 million.
LA ROSA PROJECT. The Company will acquire from Esenjay an 8% interest in
this project, which consists of approximately 7,700 gross acres of leases and
options in Refugio County, Texas. The La Rosa Field (which is within the project
area) has produced in excess of 15 million bbls of oil and 170 Bcf of gas. A 25
square mile 3-D seismic shoot has been acquired and interpreted. The Company
believes the prospective targets are multipay Frio with the upside of the
project being the wildcat potential of the Vicksburg. Two wells have been
drilled since the Effective Date of the Acquisition Agreement that will be for
the account of the Company if the Acquisitions are consummated. One of these
wells has been completed as a Frio sands producer and is awaiting a pipeline
connection, and the other well was a dry hole. The estimated cost of drilling
and completing a Frio sands well in this project area is approximately $450,000.
PILEDRIVER PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 62.5% interest in this project, which consists of 640 gross acres of
leases located in Chambers County, Texas. Fields in the area have produced
approximately 260 Bcf of gas and 17 million bbls of oil. The objectives are two
Frio sands. One of these target sands had what the Company believes to be a
significant gas test at the top of the sand in a well that it believes is down
dip to Esenjay's acreage. A recent 3-D seismic survey has been conducted by
Western Geophysical. The Company intends to acquire and interpret 3-D seismic
data over the project area before making any drilling decisions. The estimated
cost of drilling and completing a well is approximately $1.85 million.
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WILCOX CORE AREA PROJECTS
The Company has delineated an area it believes to be highly prospective for
Wilcox sand exploration in several counties in the Middle Texas Gulf Coast.
These reservoirs are believed to exist at moderate depths and the Company
believes that it has the ability to seismically detect the presence of gas in
the primary zones of interest. Shallower targets are also generally present
throughout the area.
HALL RANCH PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 40.5% interest in this project, which consists of leases and options
covering approximately 7,500 gross acres under a 57 square mile 3-D seismic
survey in Karnes County, Texas. Fields in the area have produced approximately
250 Bcf of gas and over 20 million bbls of oil. The Company believes the Hall
Ranch area is on an under-explored ridge on trend with several producing fields.
Multiple potential pay zones in four expanded fault blocks have been delineated
in the Wilcox sands from approximately 8,000 to 17,000 feet. Known field pays
are from Wilcox reservoirs in the Migura, Roeder, Bunger, Hackney, Middle Wilcox
L series sands, and the Upper Wilcox. The Company has delineated several
potential drill sites. Drilling has commenced on a deep well in which the
Company will own a working interest if the Acquisitions are consummated. Based
upon review of electrical logs, the Company believes this well has discovered a
field in the First Roeder. Casing has been run to protect this zone. Because of
the advantageous structural position encountered at the First Roeder formation
and an attractive acreage position, the Company has decided to drill the well
deeper to test additional Wilcox zones. This well was drilled at a location in
which the Company will own a 20.25% working interest if the Acquisitions are
consummated. The Company will own a 40.5% interest in the offset locations.
Estimated drilling and completed well costs in the project area range from
approximately $270,000 to $600,000 for shallow wells, while wells completed in
the deep zones (to 12,500 feet) cost approximately $2 million.
HORDES CREEK PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 40.5% interest in this project, which contains leases and options on
approximately 8,300 gross acres located in Goliad County, Texas. The Company
believes Hordes Creek has potential in the Miocene, Frio, Yegua, and the Upper,
Middle, and Lower Wilcox. The targeted feature has produced approximately 100
Bcf of gas to date from fields in the project area. Preliminary migrated 3-D
seismic data covering 25 square miles is being interpreted, and the Company has
identified five potential drilling locations. The Company currently is
attempting to delineate additional prospect leads from this data set. Drilling
has commenced on a well in which the Company will own a working interest if the
Acquisitions are consummated. The estimated cost of drilling and completing a
9,500 foot well in the project area is approximately $800,000.
MIKESKA PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 38% interest in this project, which consists of leases covering
approximately 8,200 gross acres located in Live Oak County, Texas. Fields in the
area have produced approximately 200 Bcf of gas and two million bbls of oil. The
Company believes that this exploration play is characterized by excellent
reservoir rock in the Wilcox. Multiple pay potential exists from 8,500 feet to
at least 16,000 feet. This portion of the Wilcox trend contains known pays from
the Hockley, four Queen City sands, four Slick sands, six Luling sands, three
Tom Lyne sands and three to five House sands. A 31 square mile 3-D seismic
survey has been shot and the data is being interpreted. The Company has
identified several drill sites. A well has been drilled and is currently waiting
to be completed in which the Company will own a working interest if the
Acquisitions are consummated. The estimated cost to drill and complete a shallow
well is $800,000 with deeper wells costing approximately $1.4 million.
DUVAL, MCMULLEN PROJECT. The Company will acquire from Esenjay a 90%
interest in this project, which consists of approximately 2,000 gross and net
acres of options in Duval and McMullen Counties, Texas. A field that has
produced approximately one half trillion cubic feet of gas is adjacent to this
acreage. Immediate plans are to acquire a one year old proprietary 3-D seismic
survey and interpret the 3-D seismic data before drilling. Drilled and completed
well costs are estimated to be approximately $800,000 for
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shallow wells (the bulk of the area production has come from these shallower
field pays) with deeper wells costing approximately $1.2 million.
TEXAS HACKBERRY CORE AREA PROJECTS
The Texas Hackberry embayment is a core area in Jefferson and Orange
Counties, Texas, which the Company believes offers drilling opportunities in
Hackberry (Frio) formations, as well as shallow Miocene and deeper Vicksburg
sands. The Company believes it has the ability to seismically detect the
presence of hydrocarbons in certain formations in this area. Aspect, Esenjay,
and other industry players have participated in over 20 new field discoveries
delineated via 3-D seismic data in the Texas and Louisiana portion of this
historically very difficult geologically to understand province.
LOX B PROJECT. The Company will acquire from Aspect a 25% interest in this
project, which consists of 11,700 gross acres of leases and options in Jefferson
County, Texas. Fields in the area have produced approximately 140 Bcf of gas and
17 million bbls of oil. The primary objectives of this project are the Hackberry
and Vicksburg formations. The acreage has been evaluated with 71 square miles of
3-D seismically data. The Company believes it has identified several potential
prospects through the use of seismicly detected hydrocarbon indicators. The 3-D
seismic survey has been merged with the West Port Acres data, and will
ultimately be merged with the Big Hill/Stowell and East Jeffco 3-D seismic
surveys described below. The first prospect will likely be drilled in mid-1998.
The estimated cost of drilling and completing a Hackberry well in this project
is approximately $900,000.
WEST PORT ACRES PROJECT. The Company will acquire from Aspect a 12.5%
interest in this project, on which 800 gross acres of leases in Jefferson
County, Texas have been acquired and a 21 square mile 3-D seismic survey has
been conducted. The Company believes it has identified analogous Hackberry
fields within the survey area that have produced, on average, approximately one
million bbls of oil and one Bcf of gas. The Company has identified several
Hackberry prospects. The estimated cost to drill and complete a Hackberry well
is approximately $1.5 million
BIG HILL/STOWELL PROJECT. The Company will acquire from Aspect a 50%
interest in this project, which consists of over 10,000 gross acres of leases
and options in Jefferson County, Texas. Big Hill Field (which is within the
project area) was discovered in 1941 and contains approximately 70 field
segments recognized by the Texas Railroad Commission. Historical production in
the area has exceeded 180 Bcf of gas and nine million bbls of oil. The initial
seismic interpretation has been completed and the Company has generated several
prospects, some of which are scheduled for 1998 drilling. The estimated cost to
drill and complete a shallow well is approximately $700,000 with deeper wells
costing approximately $1.5 million.
EAST JEFFCO PROJECT. The Company will acquire from Aspect a 50% interest in
this project, which consists of 24,000 gross acres of leases and options in
Jefferson County, Texas. Fields in the area have produced approximately 350 Bcf
of gas and 39 million bbls of oil. The Company is participating in a 65 square
mile 3-D seismic survey that is scheduled for the second quarter of 1998, with
Hackberry sands being the primary target. The Company believes additional
potential exists in the shallow Frio and deeper Vicksburg formations. The
estimated cost to drill and complete a Hackberry well ranges from approximately
$1.0 million to $1.5 million.
WEST BEAUMONT PROJECT. The Company will acquire from Aspect a 6.25%
interest in this project, which consists of 11,200 gross acres of leases and
options in Jefferson County, Texas. The project falls within an established
Hackberry trend, which has experienced over 20 new field discoveries in the past
year. A 22.5 square mile 3-D seismic survey has been received and will be
interpreted by the Company. The estimated cost to drill and complete a Hackberry
well is approximately $1.3 million.
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SEED PROJECTS
WILLACY COUNTY PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 78.875% interest in this project, which consists of approximately
10,200 gross acres of leases and options in Willacy County, Texas. Fields in the
area have produced approximately 78 Bcf of gas and 2.5 million bbls of oil. This
project includes separate geologic structures known by four different field
names. The pre 3-D seismic geologic study of this area has identified six
possible drilling locations. These locations were picked as a result of
subsurface well correlation and production analysis. A 50 square mile 3-D
seismic survey is scheduled to be shot in the third quarter of 1998. The
estimated cost of drilling and completing a well in this project area is
approximately $550,000.
CANEY CREEK PROJECT. The Company will acquire from Aspect a 12.5% interest
in this project, which consists of options and leases covering 21,000 gross
acres in Matagorda and Wharton Counties, Texas. This project is near two Frio
fields that together have produced approximately 2.4 trillion cubic feet of gas
and 86 million bbls of oil. The project targets the Frio and Yegua reservoirs. A
32 square mile 3-D seismic survey has been conducted and the interpretation of
the data should be finished by the end of 1998. The estimated cost to drill and
complete a shallow well is approximately $700,000 with deeper wells costing
approximately $2.0 million.
EAST TEXAS PINNACLE REEF TREND PROJECT. Aspect and certain of its
affiliates have licenses covering approximately 400 square miles of 3-D seismic
data pertaining to the East Texas Cotton Valley Reef Trend. This seismic data is
recently acquired and most of it is proprietary. Currently, there is no acreage
position or defined drilling opportunity associated with this project. The
Company intends to enter into a joint venture with Aspect or its affiliates to
attempt to generate drillable prospects. The joint venture will, if consummated,
be subject to the terms of any licensing or other agreements currently in
effect.
NON CORE PROJECTS
THOMPSON CREEK PROJECT. The Company will acquire from Esenjay a 56%
interest in this project, which consists of approximately 2,200 gross acres of
leases and options in Wayne County, Mississippi. The Company has generated a
prospect from subsurface and 2-D seismic data indicating multiple potential oil
pays ranging from 7,000 feet to 17,000 feet in depth. However, the Company
intends to acquire and interpret 3-D seismic data before commencing drilling.
Approximately 12 square miles of full fold 3-D seismic data will be necessary to
image the acreage position. A 3-D seismic survey is being conducted by a seismic
vendor over this area and the processed data should be delivered in the third
quarter of 1998. The estimated cost to drill and complete a 15,500 foot Cotton
Valley well in this project is approximately $1.5 million.
LIPSMACKER PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 22% interest in this project, which consists of approximately 15,000
gross acres of leases and options in Choctaw, Alabama and Clarke Counties,
Mississippi. Esenjay completed a 64 square mile 3-D seismic survey in the fall
of 1996, and while several drilling locations were delineated, the results were
generally disappointing. The Company believes there are two remaining drillable
locations. The Company is unlikely to invest its own capital in drilling these
wells unless new, favorable data becomes available. The estimated costs of
drilling and completing a well in this project area are approximately $1.15
million.
BACKGROUND OF THE ACQUISITIONS
In mid-1996, the Company refocused its activities from acquiring natural gas
reserves principally in the Mid-Continent region of the United States to
concentrate on exploration and related developmental drilling projects in
Southern Louisiana and along the Gulf Coast region of Alabama, Mississippi and
Texas. The Company's most significant interest in the Gulf Coast region is the
Starboard Project, which is composed of a group of exploration prospects as well
as undeveloped locations.
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During 1996 and the first six months of 1997, the Company's drilling
activities, which were based primarily on 2-D seismic data, were unsuccessful.
This unsuccessful drilling activity, along with an unexpected drop in production
from the Company's Mobile Bay area wells, reduced the Company's cash and capital
resources at the time the drilling phase of the Starboard Project was
approaching. To address the Company's capital needs for the Starboard Project
and other activities, the Board of Directors, at its meeting on August 12, 1997,
directed management to look for potential assets to acquire in exchange for the
Company's Common Stock, to identify and review potential business consolidation
opportunities, identify potential partners to help fund the Company's proposed
drilling activities on the Starboard Project and in other locations, and to
consider any other avenues to strengthen the Company's capital resources and
diversify its exploration opportunities. The Board also directed management to
reduce overhead wherever prudently possible. The Company retained GBI as
investment advisor to aid in achieving these objectives.
To better position the Company to enter into a potential transaction, the
Company called a special shareholders meeting to increase its authorized Common
Stock from 20,000,000 to 40,000,000 shares. The Company's shareholders approved
the increase on October 20, 1997. The Board also determined to not further
extend any existing employment contracts with senior management, and to settle
any deferred compensation liabilities with those individuals, to create more
flexibility in pursuing all appropriate alternatives for strategic business
consolidations. See "Management--Employment Agreements."
The Company, in conjunction with GBI, began reviewing sources of capital and
consolidation candidates, and where appropriate, entered preliminary discussions
to identify those candidates that the Company considered most attractive and
that had a similar interest in pursuing negotiations. GBI sourced and evaluated
potential transactions. Weisser Johnson & Co., an investment banking firm, also
was engaged to help the Company source potential transactions.
The Company first contacted Alex Cranberg of Aspect in early September of
1997, and had its first meeting with Aspect on September 25, 1997. Preliminary
discussions focused on the Company's proposed acquisition of certain Aspect
assets along with some form of ongoing business alliance between the Company and
Aspect. The discussions proceeded rapidly, and several meetings between the
parties were held in Houston and Denver during September and October 1997.
Management pursued parallel paths with other candidates with a goal of
presenting an array of potential opportunities to its Board of Directors in
November 1997.
By the end of October, a transaction with Aspect had emerged as one of the
Company's most attractive opportunities due to the geographic diversity Aspect's
prospects could bring to the Company's exploration portfolio, and the talent of
Aspect's technical and management staff that could potentially become allied
with the Company. At least two major issues, however, precluded agreement to
preliminary terms of a business combination with Aspect. One was a potential
unacceptable tax liability for Aspect, and the other was the collective desire
to strengthen the Company's full time exploration management team.
The Company continued to pursue an array of potential capital sources and
consolidation candidates throughout October and November 1997. In November, Mr.
Cranberg identified Esenjay as a party whose assets would complement the Aspect
Assets and the Company's existing asset portfolio. In addition, the Company's
acquisition of the Aspect Assets and the Esenjay Assets in exchange for Common
Stock would enable the parties to treat the transaction as a tax-free exchange
under Section 351 of the Internal Revenue Code. Mr. Cranberg advised that Aspect
had participated in several exploration projects with Esenjay, and that
Esenjay's exploration and management talent could augment the Company's
management team as well as the diversity of the geographically focused,
technology enhanced, exploration projects.
The Company agreed to pursue a potential transaction with Aspect and
Esenjay. In November, Mr. Cranberg met with Esenjay to discuss a possible
consolidation. During the week of November 10, 1997, several meetings and
conversations were held among the Company, its investment advisors, Aspect and
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Esenjay. After these meetings, the parties agreed that a potential acquisition
by the Company of Esenjay's exploration project portfolio, portions of Aspects
projects located in compatible locations, and a pooling of the Company's and
Esenjay's management talents could create a strong project inventory and talent
base comparable or superior to those of strong smaller-cap independent
exploration companies.
In November 1997, the Company concentrated on negotiating favorable terms
with other likely strategic merger or consolidation candidates, with a goal of
presenting several viable, substantive proposals to its Board before the end of
the month. The Board met on November 24, 1997, at which time management and GBI
reviewed the status of negotiations with Aspect and Esenjay, as well as other
potential candidates. Since the potential opportunities were likely to result in
changes in the Company's management, the Compensation Committee of the Board
negotiated settlement terms with members of the Company's management whose
contracts extended beyond December 31, 1997. The renegotiated employment
contracts were designed to remove barriers to any potential Company
consolidation opportunities. In addition, the Company entered into Incentive
Agreements with certain members of its senior management to motivate such
management members to negotiate and close a significant corporate transaction.
See "Management--Employment Agreements."
By this time, the basic structure of the primary terms now included in the
Acquisition Agreement had been formulated. These included the identification of
the assets to be acquired, management changes, including Michael E. Johnson
assuming the position of President and Chief Executive Officer of the Company,
the composition of the ongoing Board of Directors, and the basic economic terms
of the Acquisitions. The Company's Board set another meeting for December 3,
1997, and directed management to advise all parties negotiating with the Company
that all substantive proposals would be reviewed and compared at that meeting,
and that the Board would likely authorize execution of a preliminary agreement
with respect to the most attractive proposal at that time.
In the nine days before the December 3, 1997 Board meeting, management
focused its efforts on opportunities that could reach the point of a substantive
presentation at the Board meeting. Management endeavored to finalize the optimal
potential transaction terms with each candidate with which it was negotiating.
GBI reviewed all of the proposals submitted by the transaction candidates,
discussed those proposals with the candidates involved, and gave an oral report
to the Company concerning its evaluation of each of the proposals.
Four proposals were reduced to substantive written form before the meeting.
The four candidates were the Aspect/Esenjay group, Coastal Production LLC,
("Coastal"), Middle Bay Oil Company, Inc. ("Middle Bay") and Reliance Resources
PLC ("Reliance"). The Company determined that the Coastal proposal would not
provide the Company with adequate capital and resources to pursue its business
objectives, and as such, would at best have been a stop gap measure. The Company
determined that the Middle Bay proposal would not provide the Company adequate
value and upside to the Company's shareholders. The Reliance proposal was
conceptional in nature, and subject to negotiation of many basic terms, as well
as completion of due diligence. Due to the limited due diligence work Reliance
conducted, the Company believed it was difficult to quantify the likelihood of
achieving a tangible deal. In addition, the Company determined that a tangible
proposal, if forthcoming, would be somewhat competitive with the proposal
received from Aspect and Esenjay, and the Company's Board of Directors did not
believe that the Reliance proposal would likely be superior due to the upside
potential inherent in the Aspect/ Esenjay proposal.
After review of all proposals, the Board reached the unanimous decision that
the transaction with Aspect and Esenjay would create an entity with (i) the
broadest, yet geographically focused, array of exploration opportunities, and
(ii) management and other elements in place that would create the greatest
upside potential, combined with effective risk management, all pursuant to terms
that the Board considered to be reasonable.
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The Board unanimously agreed that the transaction with Aspect and Esenjay
was the best option for the Company's shareholders. At the meeting, the Board
authorized management to enter a Memorandum of Agreement with Aspect and Esenjay
pursuant to which the parties agreed to seek to negotiate a definitive
agreement. This Memorandum of Agreement also required Aspect to lend the Company
$1.8 million pursuant to the Initial Bridge Facility, and was subject to due
diligence, receipt of an independent fairness opinion acceptable to the Board,
and negotiation of definitive terms.
The Company then began an intensive period during which the Initial Bridge
Facility was negotiated, due diligence was conducted by each of the three
parties to the Acquisition Agreement, and the terms and provisions of the
Acquisition Agreement were negotiated. Related negotiated issues included the
decision to redeem the Company's outstanding Preferred Stock, the proposed
change of the Company's name to Esenjay Exploration, Inc., the change of the
Company's state of incorporation from Oklahoma to Delaware, the registration
rights relating to the Common Stock to be issued in exchange for the Esenjay
Assets and the Aspect Assets, and numerous other details included in the
Acquisition Agreement.
The Company held another Board meeting on January 13, 1998, at which due
diligence and valuation reports and the form of the Acquisition Agreement were
presented by GBI and management and considered by the Board. After considering
this analysis, the Board unanimously approved execution of the Acquisition
Agreement. The Acquisition Agreement was executed January 19, 1998, and is
subject to, among other items, receipt and review by the Board of a final
fairness opinion from GBI satisfactory to the Board (which was received on
February 10, 1998), and approval by the Company's shareholders.
The Acquisition Agreement was amended as of April 20, 1998, to clarify (i)
the registration rights granted to Aspect and Esenjay with respect to the Common
Stock they will receive pursuant to the Acquisitions; (ii) the Company's
obligations with respect to the preparation and mailing of this Proxy Statement;
(iii) the Company's obligations with respect to the closing of the Acquisitions
and implementation of the Reverse Split to give the Company sufficient shares
for issuance upon consummation of the Acquisitions; (iv) the authorization of
the Reincorporation and (v) the election of the nominees named in this Proxy
Statement for election as directors.
REASONS FOR THE ACQUISITIONS
The Company's Board of Directors has unanimously determined that the terms
of the Acquisition Agreement are fair and in the best interests of the Company's
shareholders. The Board of Directors, therefore, unanimously approved and
adopted the Acquisition Agreement and recommends the approval and adoption of
the Acquisition Agreement by the Company's shareholders.
The Board of Directors believes that the Acquisitions represent an
opportunity to create a company focused on onshore Gulf Coast exploration using
technology enhanced opportunities. The Board further believes the magnitude and
diversity of drilling opportunities acquired pursuant to the Acquisition
Agreement will allow the Company to spread its exploration risks over quality,
technology enhanced projects, while increasing its ability to access capital
markets.
The following are the material factors the Board considered in reaching its
conclusions: (i) the quality, diversity and potential realizable value of the
Esenjay Assets and the Aspect Assets; (ii) the talents of the Esenjay managerial
personnel that will join the Company following consummation of the Acquisitions;
(iii) Aspect's willingness to lend the Company $1.8 million pursuant to the
Initial Bridge Facility to finance certain exploration and 3-D seismic costs,
leasehold acquisitions and development of oil and gas properties before the
Closing of the Acquisitions; (iv) the Company's enhanced ability to negotiate
the terms of the New Credit Facility due to the strengthened asset base to be
provided through the Acquisitions and through the participation of Esenjay and
Aspect in the Company's ongoing business; (v) the expected favorable treatment
of the Acquisitions under U.S. federal income tax laws; (vi) Cornerstone's
preliminary analysis concerning the fair market value of the Esenjay Assets and
the Aspect Assets, as described further below, (vii) the analysis and opinion of
GBI concerning the fairness of the Acquisitions to the Company's
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shareholders from a financial point of view, as described further below; (viii)
management's belief that the onshore exploration and drilling industry is
rapidly consolidating, and that in such an environment, the Company's business
prospects were anticipated to be stronger after the Acquisitions than those of
the Company alone due to the enhanced competitive position of the combined
Company; (ix) the judgment, advice and analyses of the Company's management with
respect to the strategic, financial and potential operational benefits of the
Acquisitions, based in part on the business, financial and legal due diligence
investigations performed with respect to Esenjay, Aspect and the properties to
be acquired in the Acquisitions; and (x) the Company's expected financial
condition and results of operations absent the Acquisitions, including the need
for additional capital to facilitate the growth of its business and the
uncertain prospects of obtaining additional capital in amounts, and on terms,
that would be satisfactory.
The foregoing discussion of the information and matters the Board of
Directors considered is not intended to be exhaustive, but includes the material
factors the Board considered. In view of the wide variety of factors considered
in connection with its evaluation of the Acquisition Agreement, the Board of
Directors did not find it practicable to, and did not, quantify or otherwise
attempt to assign relative or specific weights to the foregoing factors, and
individual directors may have given different weights to different factors.
Rather, its conclusions were based on the totality of the information that was
presented to, and considered by, the Board.
OPINION OF CORNERSTONE VENTURES, L.P.
GENERAL. Set forth below is a summary of the Cornerstone Opinion. Such
summary sets forth a description of the assumptions made, the general procedures
followed, the factors considered and the limitations on the review undertaken.
The discussion is a summary only, and shareholders are encouraged to read the
full text of the Cornerstone Opinion, especially with regard to the assumptions
made and factors considered by Cornerstone. A copy of the Cornerstone Opinion is
attached hereto as Appendix B, and is incorporated by reference herein in full.
Cornerstone has delivered an opinion to the Company (the "Cornerstone
Opinion") stating that the fair market value of Esenjay Assets and Aspect Assets
is approximately $54.2 million. For purposes of such opinion, Cornerstone
defined fair market value as the price in cash at which a property would change
hands between a willing buyer and a willing seller, with neither party acting
under compulsion, and both parties having reasonable knowledge of relevant
facts.
INFORMATION REVIEWED. In connection with the Cornerstone Opinion,
Cornerstone reviewed the following information: (i) a draft of the Acquisition
Agreement; (ii) detailed materials prepared by the Company, Esenjay and Aspect
regarding the oil and gas properties to be conveyed, including geologic and
seismic based maps, seismic data, lease maps, and similar data; (iii) a summary
description of, as well as summary information regarding, each of the oil and
gas properties to be conveyed; (iv) the QUARTERLY RESERVE REPORT published by
Cornerstone setting forth prices paid per unit in actual purchases and sales of
oil and gas interests; (v) Cornerstone's proprietary database containing
information regarding actual purchases and sales of oil and gas interests,
including information on recent transactions in the Company's areas of
exploration; and (vi) published data concerning historical and projected oil and
gas prices in the United States. In addition, Cornerstone attended meetings in
the offices of the Company, Esenjay and Aspect to review the detailed data
discussed above and to hear presentations by, and ask questions of, the
technical personnel involved with each specific property to be conveyed.
DATA RELIED UPON. In preparing the Cornerstone Opinion, Cornerstone relied
upon the accuracy and completeness of, and did not independently verify (other
than employing its own appropriate internal tests of reasonableness and
consistency and participating in the meetings described above) the business,
financial, geological, geophysical, engineering and other information supplied
regarding the Esenjay Assets and the Aspect Assets.
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FACTORS CONSIDERED. In all valuations of oil and gas interests, Cornerstone
used more than one approach to arrive at an estimate, because an estimate based
on several approaches is likely to be more reliable than an estimate based upon
a single approach. The most widely used methodology to estimate the value of
producing properties is discounted future net revenues derived from a
comprehensive technical assessment of future production and reserves. In the
case of the Acquisitions, however, because the Esenjay Assets and Aspect Assets
are not producing, Cornerstone instead used prices paid in comparable
transactions. Calculations of estimated value were made on the basis of risk
adjusted reserves derived from a comprehensive technical assessment.
Additionally, calculations were made of the estimated replacement costs that a
buyer would have to incur to bring the individual properties to their current
state of development. Both of these calculations then were compared to actual
transactions. Cornerstone also considered the market supply and demand
environment for oil and gas reserves and exploration prospects in the United
States, and the current commodity price environment. Such price environment
generally has short-term volatility, particularly for gas, which adds an extra
element of risk to oil and gas reserve transactions. The current active drilling
environment for oil and gas and its effect on the value of properties in the
regions where the oil and gas properties to be conveyed to the Company also was
considered.
Cornerstone considered certain data concerning each of the properties
comprising the Esenjay Assets and Aspect Assets. After reviewing the data
presented by each company, and hearing a presentation as to the stage of
exploration or exploitation of each property, Cornerstone made adjustments to
the reserve estimates where appropriate to reflect those reserves that
reasonably could be categorized as possible reserves. The Cornerstone Opinion
provides that the total reserves associated with these properties is
approximately 3.2 Tcfe. The Cornerstone Opinion also provides that the total net
working interest reserves involved in the Acquisitions is approximately 1.25
Tcfe, comprised of 468 Bcfe from Aspect, 576 Bcfe from Esenjay and 210 Bcfe from
the Company.
For purposes of the Cornerstone Opinion, each category of reserves were risk
adjusted. The risk factor used for reserves categorized as possible was 6%,
I.E., the estimated possible reserves would be multiplied by 6% to arrive at an
expected reserve volume. Based on Cornerstone's QUARTERLY RESERVE REPORT and its
proprietary data base, the average value in the market place for proved reserves
is approximately $.85/Mcfe. If the 6% risk factor is multiplied by the average
reserve value of $.85 per Mcfe, the result is that possible reserves would have
a fair market value of approximately $.05 per Mcfe.
ESTIMATED FAIR MARKET VALUE OF ESENJAY ASSETS AND ASPECT ASSETS. In
Cornerstone's opinion, the fair market value of the Esenjay Assets and Aspect
Assets is approximately $54.2 million and is comprised of $25.4 million Aspect
Assets and $28.8 million of Esenjay Assets.
As a test of reasonableness of the above described reserve-based estimates,
Cornerstone also undertook a series of calculations that are reflected in the
Cornerstone Opinion. Cornerstone believes a mathematical relationship can exist
between the fair market value of the replacement cost of a group of properties
of the quality and type to be conveyed to the Company and the approximate
replacement cost for a buyer to acquire the land position and seismic data
associated with such a group of properties. Overall, Cornerstone found that the
fair market value of such properties ranges from 1.7 to 2.0 times their
replacement costs.
Based on Cornerstone's estimate of the average cost to acquire such acreage
and the estimated replacement cost associated with the acreage involved (acreage
cost multiplied by the net acreage), the estimated replacement cost associated
with the acreage position that the Company would hold after the Acquisitions is
approximately $16.6 million.
As to seismic data, the Cornerstone Opinion reflects the gross amount of
seismic assets in square miles associated with each property. These seismic
projects are in various stages of development or completion. Some seismic data
have been acquired and fully interpreted, others have yet to be acquired, but
have been or are in the process of being designed. Cornerstone estimated the
unit costs per square
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mile to bring these projects to their current stage of development. Cornerstone
then multiplied the gross square miles associated with each project, times the
working interest to be conveyed, times the unit cost, to arrive at each
property's estimated net seismic replacement cost. The total estimated
replacement cost associated with these seismic projects was $10.2 million. The
aggregate replacement cost for these assets was approximately $26.8 million.
The calculated reserve-based fair market value of the properties is
approximately 2.0 times the aggregate estimated replacement cost associated with
them. This ratio is within the range of relational values that have occurred in
actual transactions.
For the reasons explained above, it is Cornerstone's opinion that the
estimated fair market value of the properties acquired in the proposed
transaction is approximately $54.2 million, comprised of $25.4 million and $28.8
million provided by Aspect and Esenjay, respectively. The estimated fair market
value of each property involved in the Acquisitions is included in the
Cornerstone Opinion.
COMPENSATION. Cornerstone was compensated for its engagement in accordance
with its regular compensation schedule. There is no relationship between
Cornerstone and the Company or GBI that would impair the objectivity of its
opinion, and compensation for the Cornerstone Opinion was independent of the
conclusions reached.
OPINION OF GAINES, BERLAND INC.
SCOPE OF GBI OPINION. Set forth below is a summary of the GBI Opinion. Such
summary sets forth a description of the assumptions made, the general procedures
followed, the factors considered and the limitations on the review undertaken.
The discussion is a summary only, and shareholders are encouraged to read the
full text of the GBI Opinion, especially with regard to the assumptions made and
factors considered by GBI. A copy of the GBI Opinion is attached hereto as
Appendix C, and is incorporated by reference herein in full.
The Company engaged GBI to act as a financial advisor with respect to the
transactions contemplated by the Acquisition Agreement. The Board of Directors
instructed GBI, in its role as financial advisor, to evaluate and render its
opinion as to whether the consideration to be paid pursuant to the Acquisition
Agreement was fair to the Company's shareholders from a financial point of view.
At a special meeting of the Company's Board of Directors on February 10, 1998,
GBI delivered its oral opinion and written opinion (the "GBI Opinion") that, as
of such date, based upon and subject to the various considerations expressed in
the GBI Opinion, the consideration to be paid pursuant to the Acquisition
Agreement was fair to the Company's shareholders from a financial point of view.
At the February 10, 1998 meeting, GBI presented to the Board of Directors an
overview of the transaction and the consideration to be paid to Esenjay and
Aspect. GBI compared for the Board of Directors the proposed transaction with
Esenjay and Aspect to an analysis GBI had performed of the other proposals
submitted by transaction candidates. GBI gave its opinion to the Board of
Directors that the Esenjay and Aspect transaction was the most attractive
opportunity for the Company's shareholders. GBI presented to the Board of
Directors a description of its fairness opinion that the consideration to be
paid to Esenjay and Aspect was fair to the Company's shareholders from a
financial point of view. The GBI Opinion addresses only the fairness from a
financial point of view of the consideration to be paid to Esenjay and Aspect or
its assigns pursuant to the Acquisition Agreement and does not address any other
terms of the Acquisitions or the Company's underlying business decision to
effect the Acquisitions. The following is a discussion of the information GBI
reviewed and its analyses of such information, as presented orally to the
Company's Board of Directors on February 10, 1998. The GBI Opinion was delivered
for the information of the Company's Board of Directors and does not constitute
a recommendation to any shareholder of the Company as to how such shareholder
should vote at the Special Meeting.
ASSUMPTIONS. The GBI Opinion was necessarily based upon information
available to GBI, and economic, financial, market and other conditions as they
existed and could be evaluated on the date of the
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GBI Opinion. Although subsequent developments may affect its opinion, GBI does
not have any obligation to update, revise or reaffirm the GBI Opinion. In its
review and analysis and in rendering its opinion, GBI assumed and relied upon
the accuracy and completeness of the representations and warranties made by the
Company, Esenjay and Aspect in the Acquisition Agreement, as well as all of the
financial and other information provided to it by the Company's management or
publicly available, including without limitation, information with respect to
tax positions, contingent liabilities, condition of assets and material contract
terms, and GBI did not assume any responsibility for the independent
verification of such information. GBI did not conduct a physical inspection of
any of the properties or facilities of the Company, Esenjay or Aspect. In
preparing the GBI Opinion, GBI did not independently verify the business,
financial, geological, geophysical, engineering and other information supplied
regarding the Company, Esenjay and Aspect.
INFORMATION REVIEWED. In rendering its opinion, GBI reviewed such
information and considered such financial data and other factors as GBI deemed
relevant under the circumstances, including among others, the following: (i) the
terms and conditions of the Acquisition Agreement; (ii) the historical and
current financial condition and results of operations of the Company; (iii)
certain non-public financial and non-financial information prepared by the
respective managements of the Company, Esenjay and Aspect, which data were made
available to GBI in its role as financial advisor to the Company; (iv) published
information regarding the financial performance and operating characteristics of
a selected group of companies that GBI deemed comparable; (v) business prospects
of the Company when taking into consideration the impact of the Acquisitions;
(vi) the historical and then-current market prices for the Company's Common
Stock and for the equity securities of certain other companies with businesses
that GBI considered relevant to its inquiry; (vii) publicly available
information, including research reports on companies that GBI considered
relevant to its inquiry; and (viii) the nature and terms of other recent
acquisition transactions in the onshore exploration and drilling industry. GBI
also met with certain officers and employees of the Company, Esenjay and Aspect
to discuss the foregoing, as well as other matters believed relevant to its
opinion.
ANALYSIS. After reviewing this information, GBI concluded that in view of
the Company's declining financial results for the last several quarters, its
operational and financial outlook was uncertain. Additionally, during 1996 and
1997, the Company's drilling activities were primarily unsuccessful, resulting
in six dry holes and one unsuccessful sidetrack operation. Due to the Company's
unsuccessful drilling activities, the Company's cash and capital resources were
substantially reduced, and the Company began to reduce overhead, and determined
to focus on existing properties and impose a moratorium on seeking new
prospects. The Company currently has limited access to additional sources of
capital to fund its upcoming capital expenditures in connection with the
exploration and production of its oil and gas properties. GBI attributed the
decrease in the Company's stock price since its equity offering on August 9,
1996, primarily to these factors. GBI reviewed the Company's recent stock market
performance and compared such performance to a group of publicly-traded
exploration oil and gas companies deemed comparable including: Brigham
Exploration Company, Carrizo Oil & Gas, Inc., Edge Petroleum Corporation,
Parallel Petroleum Corporation, and 3DX Technologies Inc. (the "Exploration
Comparables"). GBI observed that over the period from August 9, 1996 through
January 30, 1998, the Company's stock price had declined 60% and traded
significantly below an index of the Exploration Comparables and the S&P 500.
GBI deemed traditional valuation methods, including comparable company
analysis, discounted cash flow analysis and comparable transaction analysis, not
meaningful in arriving at its opinion. Instead, GBI relied on an opinion of
Cornerstone addressed to GBI as to the fair market value of the oil and gas
assets currently owned by the Company, as well as Cornerstone's Opinion as to
the fair market value of the Esenjay Assets and Aspect Assets to be conveyed to
the Company upon consummation of the Acquisitions. Fair market value is defined
in Cornerstone's opinion to GBI to mean the price in cash at which a property
would change hands between a willing buyer and a willing seller, with neither
party acting under
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compulsion, and both parties having reasonable knowledge of relevant facts. The
Cornerstone opinion as to the fair market value of the Company's assets is
included as an exhibit to the GBI Opinion.
As part of its analysis, GBI compared the fair market value assigned to the
assets of the Company, Esenjay and Aspect by Cornerstone with the value assigned
to each upon completion of the transaction. Cornerstone determined that the
aggregate fair market value of the properties involved in the transactions was
$64.7 million, comprised of $10.5 million, $28.8 million and $25.4 million being
provided by the Company, Esenjay and Aspect, respectively.
The Acquisition Agreement calls for the Esenjay Assets and the Aspect Assets
to be transferred to be free and clear of all indebtedness, except for $1.0
million of Esenjay's indebtedness. In addition, at Aspect's option, and subject
to the mutual agreements of the parties, the Aspect Assets will be subject to a
$3.8 million liability to JEDI, and in such event, the Company will assume and
discharge the debt, and the Company and JEDI will enter into an Exchange
Agreement pursuant to which JEDI will agree to convert such debt into 675,000
shares of Common Stock. Therefore, if the Aspect Assets are encumbered by such
debt as of the Closing Date, such debt will be assumed by the Company and
extinguished by issuing to JEDI 675,000 shares of Common Stock and by decreasing
the number of shares of Common Stock issuable to Aspect in the Acquisitions by
675,000 shares.
To arrive at comparable values for the Company, Esenjay and Aspect, GBI
adjusted the values established by the Cornerstone Opinion as to the fair market
value of the Company's assets to reflect the Company's total outstanding
indebtedness, net of cash and cash equivalents, and retirement of outstanding
preferred stock, and adjusted the Esenjay value to reflect the assumption of
$1.0 million of Esenjay's indebtedness. Taking into account these adjustments,
GBI calculated an adjusted value for the Company and Esenjay of $8.3 million and
$27.8 million, respectively. Adding these adjusted values, GBI arrived at a
combined asset value of $61.5 million, representing 13.5%, 45.2% and 41.3%
ownership among the Company, Esenjay and Aspect, respectively (the "Adjusted
Valuation"). GBI compared the Adjusted Valuation and percentage ownership with
the percentage ownership established in the Acquisition Agreement. Upon
consummation of the transactions contemplated by the Acquisition Agreement
(including the Reverse Split), the current shareholders of the Company will own
1,655,985 shares, Esenjay will be issued up to 5,165,260 shares and Aspect will
be issued up to 4,941,440 shares, representing 14.08%, 43.91% and 42.01%
ownership of the Company, respectively. Based on this analysis and the Company's
declining financial performance and uncertain outlook, GBI believes that the
consideration to be paid pursuant to the Acquisition Agreement is fair to the
Company's shareholders from a financial point of view. The term "fair from a
financial point of view" is a standard phrase contained in investment banking
fairness opinions and refers to the fact that GBI's opinion as to the fairness
of the consideration to be paid to Esenjay and Aspect by the Company is
addressed solely to the financial attributes of such matters.
The description set forth above constitutes a summary of the material
analyses and assumptions GBI employed in rendering its opinion to the Company's
Board of Directors. GBI believes that its analyses must be considered as a whole
and that selecting portions of its analyses or the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the process underlying its opinion. The preparation of a fairness opinion is a
complex process, judgmental in nature, and not necessarily susceptible to
partial analysis or summary description. In its analyses, GBI made numerous
assumptions with respect to industry performance, capital market conditions,
general business, political, and economic conditions, and other matters, many of
which are beyond the control of the Company. Any estimates contained therein are
not necessarily indicative of actual values, which may be significantly more or
less favorable than as set forth therein. The analyses were prepared solely for
the purpose of GBI's providing its opinion to the Company's Board of Directors
as to the fairness to the Company's shareholders of the consideration to be paid
to Esenjay and Aspect pursuant to the Acquisition Agreement. Estimates of fair
market values of assets do not purport to be appraisals or necessarily reflect
the prices at which such assets may actually be sold. Because such estimates are
inherently subject to uncertainty and
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based upon numerous factors or events beyond the control of the parties or their
respective advisors, no assurances can be given that such estimates will prove
to be accurate.
As described above, GBI's opinion and presentation to the Company's Board of
Directors was one of many factors taken into consideration by the Company's
Board of Directors in making its determination to approve and recommend the
Acquisitions as contemplated in the Acquisition Agreement.
GBI, as part of its investment banking business, is continually engaged in
the evaluation of energy-related businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary distributions
of listed and unlisted securities, private placements, and valuations for
corporate and other purposes.
COMPENSATION. Pursuant to the terms of the engagement letter between GBI
and the Company dated December 3, 1997, the Company has agreed to pay GBI
$150,000 and reimburse GBI for $15,000 of expenses incurred before execution of
the engagement letter and to further reimburse GBI for additional out-of-pocket
expenses reasonably incurred in connection with its engagement, including the
reasonable fees and disbursements of GBI's legal counsel. The Company also
agreed to pay GBI a fee equal to $200,000 upon the closing of any additional
equity funding or mezzanine funding not underwritten by GBI in excess of $10.0
million within 18 months of the date of the engagement letter, provided the
Acquisitions have been completed. Such $200,000 fee is not payable if the
Company completes an underwritten public offering with GBI as the underwriter
within such 18 month period. An affiliate of GBI received warrants to purchase
18,750 shares of Common Stock at an exercise price of $3.00 per share in
exchange for providing guarantees of the Company's indebtedness under the
Initial Bridge Facility and the New Credit Facility.
GBI has performed underwriting and financial advisory services for the
Company in the past and anticipates it will continue to provide such services in
the future. In connection with those services, GBI has been issued an option to
purchase 67,500 shares of Common Stock and has been issued warrants to purchase
67,500 shares of the Company's Common Stock at an exercise price of $12.15 per
share.
MANAGEMENT FOLLOWING THE ACQUISITIONS
The Acquisition Agreement provides that following consummation of the
Acquisitions, the Company's Board of Directors will consist of Alex M. Cranberg,
Michael E. Johnson and Jack P. Randall, whose terms will expire at the Company's
annual shareholders' meeting in 2000; Alex B. Campbell, Charles J. Smith and
David W. Berry, whose terms will expire at the Company's annual shareholders'
meeting in 1999; and William D. Dodge III, whose term will expire at the
Company's annual shareholders' meeting in 1998. In addition, the Board intends
to fill a vacancy on the Board of Directors created by the recent death of an
existing Board member with an independent director, Jack P. Randall, who will be
a member of the Audit and Compensation Committees and an additional vacant Board
seat with an Esenjay nominee, both for terms to expire at the Company's annual
shareholders meeting in 1998. Mr. Berry will be Chairman of the Board of
Directors; Mr. Johnson will be President and Chief Executive Officer; Mr. Smith
will be Chairman of the Executive Committee; Mr. Dodge and Mr. Randall will be
members of the Audit and Compensation Committees; Mr. Cranberg will be Vice
Chairman of the Board; and David B. Christofferson will be General Counsel,
Secretary and an executive officer of the Company. See "Election of Directors."
Mr. Berry is the current Chairman of the Board and President of the Company.
Mr. Christofferson currently serves as Executive Vice President, Secretary,
General Counsel and a director of the Company. None of the other nominees for
director to be voted upon at the Special Meeting currently holds any position
with the Company.
The management team described above will serve as officers and directors of
the Company only if the Acquisition Agreement, the Reverse Split and the
Reincorporation are approved at the Special Meeting. If Acquisition Agreement,
the Amendment and the Reincorporation are not approved, then the currently
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constituted Board of Directors and executive officers of the Company will retain
their current positions and will serve until their respective terms expire.
RESTRICTIONS ON RESALES BY AFFILIATES
The Common Stock that will be issued pursuant to the Acquisition Agreement
will be Restricted Securities under Rule 144 under the Securities Act. The
Company is, however, subject to a registration rights agreement that requires
the Company to register the Common Stock issuable pursuant to the Acquisition
Agreement. The Company anticipates that such registration statement will be
filed promptly after the Special Meeting. Once such registration statement has
been declared effective under the Securities Act, such Common Stock will be
freely tradeable, however, Esenjay and Aspect have indicated that they have no
current intent to sell any of their Common Stock issuable pursuant to the
Acquisition Agreement. See "Risk Factors--Shares Eligible for Future Sale."
REGULATORY APPROVALS
The Company is unaware of any governmental regulatory approvals required to
be obtained for consummation of the Acquisitions, other than compliance with
federal securities laws and state securities or "blue sky" laws.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material United States
federal income tax consequences to Esenjay, Aspect, and the Company arising from
the Acquisitions. The summary does not purport to comment on all possible
federal income tax matters relevant to the Acquisitions. The summary is based
upon existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Department regulations promulgated thereunder, published
revenue rulings and revenue procedures of the Internal Revenue Service (the
"IRS"), applicable legislative history and judicial decisions. All such
authorities are subject to change at any time, either prospectively or
retroactively, and any such change could adversely affect the federal income tax
consequences associated with the Acquisitions.
The Acquisitions are structured and intended to qualify for tax-deferred
treatment under Section 351 of the Code. A transaction satisfies the
requirements of Section 351 if: (i) one or more persons (collectively the
"Transferor Group") transfer property to a corporation; (ii) each of the members
of the Transferor Group receive stock of the corporation in exchange for the
transferred property; and (iii) the Transferor Group is in "control" of the
corporation immediately after the exchange, which means that it owns at least
80% of the total combined voting power of all classes of stock entitled to vote,
and at least 80% of the total number of shares of all other classes of stock.
The obligations of Esenjay and Aspect to complete the Acquisitions are
conditioned upon the delivery to them at the Closing of the Acquisitions of an
opinion by Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas, to
the effect that, based upon certain customary representations and assumptions
set forth in the opinion, the Acquisitions satisfy the requirements of Section
351 of the Code. Such opinion is attached to this Proxy Statement as Appendix D.
Assuming that the Acquisitions satisfy the requirements of Section 351, the
Company will not recognize any gain (or loss) in connection with the issuance of
its Common Stock to Esenjay and Aspect as part of the Acquisitions, and will
obtain an adjusted basis in the Esenjay Assets and Aspect Assets equal to the
adjusted basis that Esenjay and Aspect, respectively, had in the Esenjay Assets
and Aspects Assets immediately before the Acquisitions, increased by the amount
of gain, if any, that Esenjay or Aspect, respectively, is required to recognize
in connection with the Acquisitions. The holding period that the Company will
have in the Esenjay Assets and Aspect Assets will include the holding period
during which Esenjay and Aspect held the Esenjay Assets and Aspect Assets,
respectively, before the Acquisitions.
Esenjay and Aspect will not recognize any gain (or loss) from the transfer
of the Esenjay Assets and Aspect Assets, respectively, to the Company as part of
the Acquisitions solely to the extent that Esenjay
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and Aspect receive shares of Common Stock in exchange for the Esenjay Assets and
Aspect Assets, respectively. With respect to any cash or other property ("boot")
that either Esenjay or Aspect receives as part of the Acquisitions in addition
to Common Stock, they will recognize taxable income in an amount equal to the
lesser of (i) any gain that they realize on the Acquisitions or (ii) the value
of the boot received. For this purpose, gain realized generally is equal to the
excess, if any, of (i) the amount of cash and the fair market value of the
Common Stock and other property received from the Company over (ii) the adjusted
basis of the property transferred to the Company. Additionally, Esenjay and
Aspect must treat as gain from the sale or exchange of the Esenjay Assets or
Aspect Assets, respectively, the amount by which the total aggregate amount of
liabilities assumed from them, respectively, by the Company as part of the
Acquisitions, plus the total aggregate amount of liabilities encumbering the
Esenjay Assets or Aspect Assets, respectively, at the time of their acquisition
by the Company as part of the Acquisitions, exceeds the total aggregate adjusted
tax basis that Esenjay or Aspect have in the Esenjay Assets or Aspect Assets,
respectively, immediately before the Acquisitions.
The adjusted basis that Esenjay and Aspect will obtain in the Common Stock
they receive as part of the Acquisitions will be equal to (i) the adjusted basis
that they had immediately before the Acquisitions in the Esenjay Assets and
Aspect Assets, respectively, (ii) increased by the amount of gain, if any, that
they are required to recognize, respectively, in connection with the
Acquisitions, (iii) reduced by the amount of money and the fair market value of
any other boot that they receive, respectively, as part of the Acquisitions,
(iv) reduced by the amount of the liabilities, if any, assumed from them,
respectively, by the Company as part of the Acquisitions, and (v) reduced by the
amount of the liabilities, if any, encumbering the Esenjay Assets and Aspect
Assets, respectively, at the time of their acquisition by the Company as part of
the Acquisitions. The adjusted basis that Esenjay and Aspect will obtain in any
boot received will equal the fair market value of such boot on the date of the
Acquisitions. The holding period that Esenjay and Aspect will have in the Common
Stock that they receive as part of the Acquisitions will include the holding
period during which they held the Esenjay Assets and Aspect Assets,
respectively, but only to the extent that the property comprising the Esenjay
Assets and Aspect Assets constituted either capital assets or property described
in section 1231 of the Code on the date of the Acquisitions.
LISTING ON THE NASDAQ SMALL-CAP MARKET
The Common Stock to be issued to Esenjay and Aspect will be listed for
trading on the Nasdaq Small-Cap Market under the symbol ESNJ, subject to notice
of issuance.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Based on the opinion of GBI to the effect that, from a financial point of
view, the terms and provisions of the Acquisition Agreement are fair to the
Company's shareholders, on the Cornerstone Opinion as to the fair market value
of the Esenjay Assets and the Aspect Assets, and on the matters summarized under
"--Background of the Acquisitions" and "--Reasons for the Acquisition," and such
other matters as were deemed relevant, the Company's Board of Directors
unanimously approved the Acquisition Agreement as being in the best interest of
the Company's shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE ACQUISITION AGREEMENT.
VOTE REQUIRED FOR APPROVAL
Approval of the Acquisition Agreement requires an affirmative vote of a
majority of the shares of Common Stock present at the Special Meeting.
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THE ACQUISITION AGREEMENT
The following is a summary of the material provisions of the Acquisition
Agreement, a copy of which is included in this Proxy Statement as Appendix A and
incorporated herein by reference. The following discussion is qualified in its
entirety by reference to the Acquisition Agreement. Capitalized terms used in
this Section and not otherwise defined in this Proxy Statement have the meanings
set forth in the Acquisition Agreement.
THE ACQUISITIONS
The Company will issue up to 5,165,260 shares of Common Stock to Esenjay in
exchange for the Esenjay Assets and will issue up to 4,941,440 shares of Common
Stock to Aspect or its assigns in exchange for the Aspect Assets. The Esenjay
Assets and Aspect Assets will be free and clear of all liabilities, obligations,
or Liens whatsoever, except for Permitted Encumbrances and certain liabilities
to be assumed by the Company.
The Acquisitions are intended to qualify as tax-free exchanges under Section
351 of the Code. See "The Acquisitions--Certain Federal Income Tax
Consequences." After consummation of the Acquisitions, the Company will continue
its operations under the name Esenjay Exploration, Inc. The Effective Date of
the Acquisitions is November 1, 1997.
ASSUMED LIABILITIES
ESENJAY. The Esenjay Assets will be conveyed to the Company subject to
liabilities to unrelated third parties in the net amount of $1.0 million. The
Company will assume and discharge such debts. In addition, the Company will
assume Esenjay's obligations under certain lease agreements (relating to
Esenjay's office space and certain office equipment) and maintenance contracts.
In addition, the Company will assume and pay Post-Effective Date Costs
incurred by or for Esenjay's account with respect to the Esenjay Assets. To the
extent that Esenjay has paid any Post Effective Date Costs on or before the
Closing Date, the Company will reimburse Esenjay for such costs no later than
180 days from the Closing Date or 10 days from the Company's receipt of funds
from any public offering of the Company's equity securities, whichever is
earlier.
The Company shall, concurrent with the Closing, offer employment to each of
the current Esenjay employees under terms determined by the Company's Board of
Directors; however, the Company has no assurance that any of the Esenjay
employees will accept such offers of employment. The Company shall assume up to
approximately $100,000 of Esenjay's accrued vacation and sick leave obligations
to Esenjay employees who accept employment with the Company.
ASPECT. The Company will assume and pay Post Effective Date Costs with
respect to certain of the Aspect Assets incurred by or for the account of
Aspect. The Company also will assume and pay Post-Effective Date Costs in excess
of certain defined amounts to be paid by Aspect with respect to the remaining
Aspect Assets. To the extent that Aspect has paid any Post Effective Date Costs
in excess of such defined amounts on or before the Closing Date, the Company
will reimburse Aspect for such costs no later than 180 days from the Closing
Date or 10 days from the Company's receipt of funds from any public offering of
the Company's equity securities, whichever is earlier.
At Aspect's option, and subject to the mutual agreement of the parties, the
Aspect Assets shall be subject to a $3.8 million liability to JEDI and, in such
event, the Company shall assume and discharge such debt, and the Company and
JEDI will enter into an Exchange Agreement pursuant to which JEDI will agree to
convert such debt into 675,000 shares of Common Stock. Therefore, if the Aspect
Assets are encumbered by such debt as of the Closing Date, such debt will be
assumed by the Company and extinguished by issuing to JEDI 675,000 shares of
Common Stock and by decreasing the number of shares of Common Stock issuable to
Aspect in the Acquisitions by 675,000.
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Certain Aspect employees own overriding royalty and working interests in
certain of the oil and gas interests included in the Aspect Assets. On or before
the Closing Date, the Aspect employees, will contribute to the Company such
overriding royalty and working interests in exchange for Common Stock. The
Common Stock issued to the Aspect employees will reduce the number of shares in
a like amount issuable to Aspect in connection with the Acquisitions.
With the prior written consent of the Company and Esenjay, Aspect shall be
permitted to sell certain of the Aspect Assets before the Closing Date. In such
event, at the Closing, Aspect shall pay to the Company the net proceeds from any
such sales of the Aspect Assets.
NON-ASSIGNABLE RIGHTS; CONSENTS
To the extent that any rights to geological or geophysical data to be
assigned to the Company by Esenjay and Aspect under the Acquisition Agreement
are not assignable without the consent of another party or the payment of any
amounts to such party, the Acquisitions shall not constitute an assignment or an
attempted assignment of such data. Esenjay and Aspect will use their
commercially reasonable best efforts to obtain the consent of each party whose
consent is required for the transfer of the data in consideration for such
assignments.
REPRESENTATIONS AND WARRANTIES
The Company, Esenjay and Aspect each made customary representations and
warranties as to, among other things, their respective corporate or limited
liability company power and organizations and compliance with law and other
agreements, their respective capitalizations, the authority and validity of the
Acquisition Agreement, required approvals, conflicts, litigation, tax matters,
environmental matters and title to assets.
ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS
The Acquisition Agreement provides that the following persons shall be
nominated to the Company's Board of Directors and shall be voted on at the
Special Meeting to which this Proxy Statement relates: (i) for a term expiring
at the Company's annual shareholders meeting in 2000, Alex M. Cranberg, Michael
E. Johnson and Jack P. Randall (ii) for a term expiring at the Company's annual
shareholders meeting in 1999, Alex B. Campbell, Charles J. Smith and David W.
Berry and (iii) for a term expiring at the Company's annual shareholders meeting
in 1998, William D. Dodge III. In addition, the Board intends to fill the
vacancy on the Board of Directors created by the recent death of an existing
Board member with an independent director, Jack P. Randall, who will serve on
the Audit and Compensation Committees, and an additional vacant Board seat with
an Esenjay nominee, both for terms expiring at the Company's annual shareholders
meeting in 1998. The Acquisition Agreement also provides that Mr. Berry shall be
Chairman of the Board of Directors; Mr. Johnson will be President and Chief
Executive Officer; Mr. Smith will be Chairman of the Executive Committee; Mr.
Cranberg will be Vice Chairman of the Board of Directors; Mr. Dodge and Mr.
Randall will be members of the Audit and Compensation Committees; and David B.
Christofferson shall be General Counsel, Secretary and an executive officer of
the Company.
Mr. Berry is the current Chairman of the Board and President of the Company.
Mr. Christofferson currently serves as Executive Vice President, Secretary,
General Counsel and a director of the Company. None of the other nominees for
director to be voted upon at the Special Meeting currently holds any position
with the Company.
CERTAIN COVENANTS AND AGREEMENTS
The Company, Esenjay and Aspect have made certain covenants and agreements
in the Acquisition Agreement, including those summarized in this Proxy
Statement. With certain limitations, the Company, Esenjay and Aspect have agreed
to give each other full access to all their respective premises, properties
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and books and records, and to cause their respective employees, agents and
representatives to furnish financial and operating data and other information
with respect to each other party as the other from time to time reasonably
requests.
CONDUCT OF BUSINESS
The Acquisition Agreement requires that each party conduct its relevant
business from the date of the Acquisition Agreement to the Closing Date
substantially as previously operated and only in the ordinary course. The
Company and Esenjay also are required to use their best efforts to preserve
intact their business organizations and relationships. Each party must promptly
notify the other parties of (i) the receipt by such party of any notice or
claim, written or oral, of a default or breach by such party, or of any
modification, termination or cancellation, or threat of termination or
cancellation, of any relevant material agreement, in the case of the Company or
Esenjay, or in the case of Aspect, any material agreement relative to the Aspect
Assets, (ii) any loss of, damage to, or disposition of (a) the Esenjay Assets or
the Aspect Assets, in the case of Esenjay or Aspect, respectively, or (b) the
Company's oil and gas interests that is reasonably likely to have a Material
Adverse Effect on such party, in the case of the Company, and (iii) after
receipt of notice thereof by the Company or Esenjay, of any claim or litigation
threatened or instituted against such party, or of any other event or
circumstance that has or may have a Material Adverse Effect on such party, or in
the case of Aspect, after receipt of notice thereof by Aspect of any claim or
litigation threatened or instituted against Aspect and relating to the Aspect
Assets. Further, the Company shall be prohibited from making any change in the
outstanding equity interests of the Company or any of its Subsidiaries, granting
any options, rights, calls or any other similar commitment or agreement with
respect to the equity interests of such entities, from declaring any dividend or
other distribution in respect of the equity interests of such entities or from
repurchasing any outstanding equity interests. Additionally, each of the Company
and Esenjay are prohibited from (x) entering into any single contract,
commitment, indebtedness or liability in excess of $50,000 and $100,000,
respectively, except that Esenjay's limitation applies only to the extent the
ownership rights in the Esenjay Assets are affected; (y) increasing the
compensation by any such entities to any of its officers, directors, employees
or other agents, other than in the ordinary course of business; and (z)
committing or omitting any act that would cause a breach of any covenant
contained in the Acquisition Agreement or that would cause any representation or
warranty contained in the Acquisition Agreement to become untrue, as if each
such representation and warranty were continuously made from and after the
effective date thereof.
A "Material Adverse Effect" generally means an event that has a material
adverse impact on the financial position, business, prospects or results of
operations of a party and its subsidiaries taken as a whole, or the ability of a
party to perform its obligations under the Acquisition Agreement; PROVIDED that
a material adverse impact does not include (i) the impact of events beyond the
control of a party, (ii) actions or omissions of a party taken with the written
consent of the other parties, (iii) changes in the prices of oil or natural gas
or (iv) in the case of the Company, its operating results from September 30,
1997 through the Closing Date; PROVIDED such results are consistent with the
Company's recent reports to the Commission under the Exchange Act. An occurrence
that results in a change of financial position of $50,000 (in the case of the
Company) and $100,000 (in the case of Aspect or Esenjay) shall be deemed to be a
material adverse impact.
NON-SOLICITATION
The Company has agreed that it will not, directly or indirectly, and will
instruct its officers, directors, employees, agents or advisors or other
representatives or consultants not to, directly or indirectly, solicit or
initiate any proposals or offers from any person relating to any acquisition or
purchase of all or a material amount of the assets of, or any securities of, or
any merger, consolidation or business combination with the Company (any such
proposal or offer being referred to herein as an "Acquisition Proposal"). The
Board of Directors may consider or negotiate an unsolicited bona fide
Acquisition Proposal. If the Board of
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Directors, after duly considering advice of outside counsel and financial
advisors, determines in good faith that it would be consistent with its
fiduciary responsibilities to approve or recommend a Superior Proposal, then,
notwithstanding any such approval or recommendation (i) the Company shall not
enter into any agreement with respect to the Superior Proposal and (ii) any
other obligation of the Company under this Agreement shall not be affected,
unless the Acquisition Agreement is terminated before or simultaneously with the
grant of such approval or the making of such recommendation.
FINANCING COVENANTS
Aspect committed to lend to the Company up to $1.8 million pursuant to the
Initial Bridge Facility. The Company granted a mortgage on certain properties to
secure the financing provided by Aspect under the Initial Bridge Facility.
Interest on the Initial Bridge Facility was at a rate of 18% per annum. In
exchange for such commitment, Aspect received warrants to purchase 9,375 shares
of Common Stock at an exercise price of $3.00 per share. An affiliate of GBI
participated in 37.5% of Aspect's obligation to lend funds to the Company
pursuant to the Initial Bridge Facility and, in exchange for such participation,
received warrants to purchase 9,375 shares of Common Stock at an exercise price
of $3.00 per share. In addition, Esenjay guaranteed up to 25% of the Company's
payment obligations under the Initial Bridge Facility and, in exchange for such
guaranty, received warrants to purchase 6,250 shares of Common Stock at an
exercise price of $3.00 per share.
Pursuant to the terms of the Acquisition Agreement, the Company, Esenjay and
Aspect negotiated with DEFS for the consummation of the New Credit Facility that
allows for advances of up to $7.8 million. Outstanding principal amounts under
the New Credit Facility bear interest at the rate of prime plus 4%. In addition,
the lender will receive cash payments equal to an overriding royalty of 0.6% of
the Company's interest in wells the Company drills while the New Credit Facility
is outstanding, and the lender has the right to gather, process, transport and
market, at competitive market rates, natural gas produced from a majority of the
projects the Company intends to acquire pursuant to the Acquisitions. On July
31, 1999, all amounts due under the New Credit Facility will be converted into a
term loan bearing interest at the rate of prime plus 4% and payable in twelve
monthly installments, the first eleven of which shall be equal to 1/30th of the
principal amount outstanding on July 31, 1999, plus interest, and a final
monthly payment of all remaining principal plus outstanding interest. The
proceeds from the New Credit Facility were used to repay the Initial Bridge
Facility (which has been terminated) and to finance certain exploration and 3-D
seismic costs, leasehold acquisitions, development of oil and gas properties,
and general corporate purposes.
In exchange for guaranteeing the indebtedness under the New Credit Facility,
Aspect, GBI and Esenjay received 9,375, 9,375, and 6,250 warrants to purchase
Common Stock at an exercise price of $3.00 per share.
INCENTIVE PLAN
At or before the Closing, the Company is required to implement an Option
Plan for its officers, directors, employees and consultants that is mutually
acceptable to the Company, Esenjay and Aspect, which shall provide for grant of
stock and stock-oriented awards in an amount of up to 15% of the shares of the
outstanding Common Stock after giving effect to the Acquisitions and any
currently outstanding options. Shareholder approval of the Option Plan will be
sought at the Company's next annual shareholders meeting following the Closing.
ADDITIONAL OBLIGATIONS
The Acquisition Agreement obligates the Company to take all action necessary
to convene the Special Meeting to (i) approve the Acquisition Agreement, (ii)
approve the Reverse Split, (iii) change the Company's state of incorporation
from Oklahoma to Delaware, (iv) elect the slate of nominees for the
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Board of Directors set forth in the Acquisition Agreement, (vi) register the
shares issuable to Aspect and Esenjay under the Acquisition Agreement for resale
under the Securities Act and (vii) any other provision counsel advises the
Company requires specific approval in order to fully implement the Acquisition
Agreement. After the Closing of the Acquisitions, the Company intends to
evaluate additional financing alternatives, which may include accessing the
public equity markets.
OTHER AGREEMENTS
The parties to the Acquisition Agreement have agreed to cooperate in the
preparation, execution and filing of all documents regarding taxes or fees that
become payable in connection with the Acquisitions.
At Closing, the Company will enter into a Technical Services Agreement and a
Land Consulting Services Agreement with Esenjay and Aspect pursuant to which
Esenjay and Aspect will provide certain consulting and interpretative services
to the Company relating to 3-D seismic and other data relating to the Esenjay
Assets and Aspect Assets. Such services will be provided at prices that the
Company believes are comparable to those that would be charged by an
unaffiliated third party in an arms-length transaction.
The Company has entered into a Registration Rights Agreement with Esenjay
and Aspect pursuant to which any time after June 30, 1998, Esenjay and Aspect
may request up to three registrations ("Demand Registrations") under the
Securities Act for all or part of their Registerable Shares (defined below) and
may participate in any registration statement the Company files (other than a
primary offering by the Company occurring on or before September 30, 1998)
("Piggyback Registrations"). Registrable Shares generally means the shares of
Common Stock to be issued to Esenjay and Aspect under the Acquisition Agreement
and the shares of Common Stock issuable to Esenjay and Aspect upon exercise of
the warrants they received in connection with the Initial Bridge Facility and
the New Credit Facility. The Company, on one hand, and Esenjay and Aspect on the
other hand, share the registration expenses relating to Demand Registrations,
but the Company must pay all registration expenses relating to Piggyback
Registrations. The Company anticipates filing a registration statement with
respect to the Common Stock issuable to Esenjay and Aspect pursuant to the
Acquisition Agreement promptly after the Special Meeting. See "Risk
Factors--Shares Eligible for Future Sale."
CONDITIONS TO THE ACQUISITIONS
The obligations of the Company, Esenjay and Aspect to consummate the
Acquisitions and the related transactions are subject to satisfaction or waiver
of certain conditions on or before the Closing, including (i) the
representations and warranties of each party must be true in all material
respects as of the Closing Date, and the parties must have complied in all
respects with their respective covenants set forth in the Acquisition Agreement;
(ii) the Company, Esenjay and Aspect shall have received opinions of counsel
covering such matters as are customarily covered in opinions delivered in
transactions of the type contemplated by the Acquisition Agreement, including a
tax opinion; (iii) the Acquisition Agreement and the related transactions must
have been approved by the holders of the requisite outstanding shares of Common
Stock; (iv) since the date of the Acquisition Agreement, there shall not have
occurred any Material Adverse Effect with respect to the Company, Esenjay or
Aspect; (v) all documents, certificates or other instruments required to be
delivered to the Company, Esenjay and Aspect at or before the Closing shall have
been so delivered; (vi) Bank of America Illinois shall have consented to the
Acquisitions and waived any existing defaults under the Credit Agreement; (vii)
all of the issued and outstanding Preferred Stock shall have been called for
redemption and the Company shall have deposited in an escrow account funds
sufficient to pay the holders of the Preferred Stock all amounts such holders
are entitled to receive in connection with such redemption; (viii) Esenjay shall
have delivered to the Company and Aspect (a) on or before January 31, 1998,
financial statements for its fiscal year ending March 31, 1997 and (b) on or
before February 10, 1998, financial statements for the nine month period ending
December 31, 1997; (ix) Aspect shall be in full compliance with its obligations
pursuant to the Initial Bridge Facility (which has been terminated); (x) the
principal officers of the Company shall be designated in writing at the Closing
to take
45
<PAGE>
office effective immediately after the Closing; (xi) the GBI Opinion in form and
substance satisfactory to counsel for the Company shall have been delivered to
the Company and copies thereof shall have been delivered to Aspect and Esenjay;
and (xii) the Company, Aspect and Esenjay shall have approved a form of
operating agreement, mutually acceptable to each of them, that addresses the
operation of the oil and gas interests jointly owned by the Company, Aspect and
Esenjay.
TERMINATION
The Acquisitions may be terminated and abandoned at any time before the
Closing in the following manner: (i) by the mutual written consent of each of
the Company, Esenjay and Aspect; (ii) by the non-breaching parties, through
written notice to a breaching party, if there has been a material breach of any
representation or warranty set forth in the Acquisition Agreement, or if, on the
Closing Date, any condition in favor of the non-breaching parties has not been
satisfied and waived; (iii) if the Closing of the Acquisitions fails to occur by
June 30, 1998, any party may terminate the Acquisition Agreement; or (iv) by the
Company if it receives a Superior Proposal.
BREAKUP FEE
If the Acquisition Agreement is terminated (i) by any party due to the
failure of the Company's shareholders to approve the Acquisition Agreement or
(ii) by the Company if it receives a Superior Proposal, then Aspect and Esenjay
shall be entitled to receive from the Company a fee equal to the sum of all
out-of-pocket expenses and fees (including fees and expenses of counsel,
accountants, experts and consultants) actually incurred or accrued by Aspect or
Esenjay in connection with the Acquisition Agreement. In addition, Aspect and
Esenjay each shall be entitled to an assignment of 10% of the Company's interest
in the Starboard Project.
INDEMNIFICATION
Each party shall indemnify, defend and hold the other parties harmless from
and against any and all losses, liabilities, damages, obligations, costs and
expenses (including legal and other similar expenses) (collectively, "Damages")
from, resulting by reason of or arising in connection with any of the following:
(i) any breach of or inaccuracy in any representation or warranty made by such
party in the Acquisition Agreement or any related document or any document
delivered at Closing; (ii) any breach of or failure by such party to perform any
of its covenants or obligations in the Acquisition Agreement or any related
document or any document delivered at Closing; (iii) in the case of Esenjay as
indemnitor only, any Damages of Aspect or the Company, other than liabilities
for Post Effective Date Costs assumed by the Company pursuant to the Acquisition
Agreement; and (iv) in the case of Aspect as indemnitor only, any Damages of
Esenjay or the Company, other than liabilities attributable to Post Effective
Date Costs incurred after December 31, 1997 and assumed by the Company.
Esenjay has agreed to retain and to release and hold the other parties
harmless from all claims, costs, expenses, liabilities and obligations
attributable to the Esenjay Assets before the Effective Date. Aspect has agreed
to retain and to release and hold the other parties harmless from all claims,
costs, expenses, liabilities and obligations attributable to the Aspect Assets
before the Effective Date or, in the case of Post Effective Date Costs, before
January 1, 1998.
The indemnification provisions of the Acquisition Agreement shall survive
the consummation of the transactions contemplated by the Acquisition Agreement,
but shall be limited to liabilities of which the party seeking indemnification
shall have notified in writing the indemnifying party within 24 months of the
Closing Date; PROVIDED, HOWEVER, that with respect to any claim for Damages
sustained by reason of a breach of any representation or warranty relating to
any liability for the Taxes of Esenjay, Esenjay's indemnification obligations
shall not be limited to 24 months, but instead shall be limited to claims for
which written notice is given to Esenjay by the appropriate taxing authority
within the period of the applicable federal or state of limitations related to
such matters.
46
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The historical financial data for the year ended December 31, 1997 are
derived from the Company's audited financial statements. The pro forma
consolidated statement of operations data for the year ended December 31, 1997
combine the Company's historical information as adjusted to give effect to the
Acquisitions as if they had occurred on January 1, 1997. The pro forma balance
sheet as of December 31, 1997 is presented as if the Acquisitions had been
consummated on that date.
The statement of operations and balance sheet are provided for comparative
purposes only and should be read in conjunction with the Company's historical
consolidated financial statements included elsewhere in this Proxy Statement.
The pro forma information presented is not necessarily indicative of the
combined financial results as they may be in the future or as they might have
been for the periods indicated had the Acquisitions been consummated as of
January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------
COMPANY PRO FORMA REFINANCING
HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Gas and oil revenues........................ $ 664,126 $ 664,126
Gain (loss) on commodity transaction........ (375,410) (375,410)
Gain (loss) on sale of assets............... 452,020 452,020
Unrealized loss on comm transactions........ (128,936) (128,936)
Operating fees.............................. 55,021 55,021
Other revenues.............................. 241,788 241,788
------------- ----------------- --------------- --------------
Total revenues............................ 908,609 908,609
------------- ----------------- --------------- --------------
Cost and expenses:
Lease operating expense..................... 427,240 427,240
Production taxes............................ 24,497 24,497
Transportation and gathering................ 143,265 143,265
Depletion, depreciation and amortization.... 315,880 315,880
Impairment of oil and gas properties........ 349,384 349,384
Exploration costs........................... 2,258,702 $ 5,230,470(a) 7,489,172
Delay rentals............................... 211,690 211,690
Interest expense............................ 60,942 12,987(f) $ 442,179(b) 516,108
General and administrative.................. 2,070,812 1,483,000(e) 3,553,812
------------- ----------------- --------------- --------------
Total costs and expenses.................. 5,862,412 6,726,457 442,179 13,031,048
------------- ----------------- --------------- --------------
Net loss.................................. (4,953,803) (6,726,457) (442,179) (12,122,439)
------------- ----------------- --------------- --------------
Preferred stock dividends..................... 103,153 (103,153)
Redemption of cumulative convertible preferred
stock....................................... (984,132) (984,132)
------------- ----------------- --------------- --------------
Net loss available for common stock......... $ (5,056,956) $ (13,106,571)
------------- --------------
------------- --------------
Net loss per common share................... $ (0.51) $ (0.71)
------------- --------------
------------- --------------
Weighted average number of shares
outstanding................................. 9,877,865 18,388,254
------------- --------------
------------- --------------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------
COMBINED
COMPANY ENTITIES PRO FORMA REFINANCING
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
------------- --------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
Cash................................ $ 690,576 $ 150,000(c) $ 750,000(b) $ 1,590,576
Accounts receivable, net of
allowance for doubtful accounts of
$15,488........................... 221,864 221,864
Prepaid and other expenses.......... 249,328 249,328
Receivables from affiliates......... 105,171 $ 564,338(f) 669,509
------------- --------------- ------------------ --------------- ------------
Total current assets.............. 1,266,939 564,338 150,000 750,000 2,731,277
Oil and gas properties.............. 3,235,848 15,563,458(g) 38,905,292(g) 1,750,000(b) 59,454,598
Other property and equipment........ 1,169,127 1,169,127
------------- --------------- ------------------ --------------- ------------
4,404,975 15,563,458 38,905,292 1,750,000 60,623,725
Less accumulated dd&a............... (1,260,605) (1,260,605)
------------- --------------- ------------------ --------------- ------------
Property and equipment, net....... 3,144,370 15,563,458 38,905,292 1,750,000
Other assets........................ 164,699 164,699
------------- --------------- ------------------ --------------- ------------
Total assets...................... $ 4,576,008 $ 16,127,796 $ 39,055,292 $ 2,500,000 $ 62,259,096
------------- --------------- ------------------ --------------- ------------
------------- --------------- ------------------ --------------- ------------
Accounts payable.................... $ 911,396 1,000,000(f) 1,911,396
Revenue distribution payable........ 68,131 68,131
Accrued expenses.................... 362,578 12,987(f) 375,565
Current portion of long-term debt... 401,085 564,338(f) 416,665(b) 1,382,088
------------- --------------- ------------------ --------------- ------------
Total current liabilities......... 1,743,190 1,577,325 416,665 3,737,180
Long-term debt...................... 22,680 3,120,763(b) 3,143,443
Non-recourse debt................... 864,000 864,000
Accrued interest on non-recourse
debt.............................. 131,400 131,400
Other long-term liabilities......... 9,918 9,918
------------- --------------- ------------------ --------------- ------------
Total liabilities................. 2,771,188 1,577,325 3,537,428 7,885,941
Cumulative convertible preferred
stock $.01 par value.............. 860 (860)(d)
Common stock, $.01 par value........ 99,359 609,402(g) 708,761
Unamortized value of warrants
issued............................ (27,163) (27,163)
Paid in capital..................... 14,668,626 38,445,890(c)(g) (1,036,568)(d) 52,077,948
Retained earnings (deficit)......... (12,936,862) 14,550,471 1,613,609
------------- --------------- ------------------ --------------- ------------
Total shareholders' equity........ 1,804,820 14,550,471 39,055,292 (1,037,428) 54,373,155
Total liabilities and shareholders'
equity............................ $ 4,576,008 $ 16,127,796 $ 39,055,292 $ 2,500,000 $ 62,259,096
------------- --------------- ------------------ --------------- ------------
------------- --------------- ------------------ --------------- ------------
</TABLE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS AND BALANCE SHEET
(a) Geological and geophysical, delay rentals and exploratory dry hole costs
for the year ended December 31, 1997 amounted to $5,230,470. These amounts
are related to properties that are not expected to produce proved reserves,
and as a result, are charged to expense under the successful efforts method
of accounting, while they had been previously capitalized by Esenjay and
Aspect under the full cost method of accounting. All other costs incurred
by Esenjay and Aspect related to the acquired prospect are leasehold
acquisitions costs which are capitalized for both full cost and successful
efforts.
(b) In conjunction with the Acquisition Agreement, the Company entered into the
Initial Bridge Facility with Aspect Management Corporation on January 19,
1998, to provide bridge financing for operations
48
<PAGE>
and initial prospect development. The principal amount of $1.8 million bore
interest at 18%, and was payable in twelve equal monthly installments
including interest beginning no later than March 31, 1998. Subsequently, on
February 23, 1998, also in conjunction with the Acquisition Agreement, the
Company replaced the Initial Bridge Facility with a $7.8 million New Credit
Facility. The New Credit Facility bears interest at prime plus 4%
(initially 12.5%), and is payable in eleven monthly installments equal to
one thirtieth (1/30th) of the outstanding principal debt evidenced by the
note on July 31, 1998, with the first of such installments commencing on
August 31, 1998, and continuing thereafter through June 30, 1999, with the
remaining principal outstanding balance due on July 31, 1999. On the date
of the execution of the New Credit Facility, the outstanding amount on the
Initial Bridge Facility was $500,000. This amount was subsequently
transferred to the New Credit Facility. In addition, the Company intends to
redeem its Preferred Stock as part of the Acquisitions, and as such,
intends to draw on the New Credit Facility for the funds necessary to
redeem the Preferred Stock. The redemption price plus accrued and unpaid
dividends at December 31, 1997 was $1,037,428. This amount combined with
the current outstanding amount on the New Credit Facility is $3,537,428.
Interest expense for the year ended December 31, 1997 on the outstanding
amount was $442,179. As of December 31, 1997, $416,665 is included as
current portion of long-term debt, with the remaining balance of $3,120,763
classified as long-term. To date, approximately $1.75 million of the
outstanding amount has been used for prospect development, with the
remaining amounts used for operations. Accordingly, $1.75 million is
classified as property, with the remaining balance of $750,000 included as
working capital on the balance sheet.
(c) In connection with the Initial Bridge Facility discussed in Note (b), the
Company issued warrants to purchase 50,000 shares of Common Stock at an
exercise price of $3.00 per share. The $150,000 in proceeds from those
warrants are included in cash at December 31, 1997. In addition, $131,250
is included in prepaid interest for the discount received between the grant
price and the market price on the date of the grant. Since the recipients
have guaranteed their pro rata share of the New Credit Facility, the
prepaid interest will be amortized over the term of the underlying debt of
17 months.
(d) In connection with the Acquisition Agreement discussed in Note (b) above,
the Company intends to redeem its Preferred Stock at a redemption price of
$10.00 per share plus all accrued and unpaid dividends. At December 31,
1997, the total redemption price for the 85,961 shares of outstanding
Preferred Stock was $1,037,428.
(e) Historical general and administrative expenses associated with personnel
and facilities of Esenjay that would become part of the Company as a result
of the Acquisitions amounted to approximately $1,483,000 for the year ended
December 31, 1997.
(f) Additions to working capital include the following:
<TABLE>
<CAPTION>
ACQUIRED
ASSETS ADJUSTMENTS
------------- -----------
<S> <C> <C>
Liabilities of Esenjay assumed by the Company.................... $ (1,000,000)
Proceeds from Warrants........................................... $ 150,000
Proceeds from new credit facility................................ 750,000
Accrued interest associated with Esenjay note payable to Aspect
assumed by the Company(1)...................................... (12,967)
Accounts receivable from Aspect to Esenjay assumed by the
Company........................................................ 564,338
Current portion of long-term debt................................ (564,338) (416,665)
------------- -----------
Total working capital (deficit).................................. $ (1,012,987) $ 483,335
------------- -----------
------------- -----------
</TABLE>
(g) The Company issued 10,106,700 shares of Common Stock in exchange for
working interests in undeveloped oil and gas prospects with a historical
full cost basis of $15,563,458 and fair market value of $54,468,750.
- ------------------------
(1) Esenjay and Aspect have interests in common oil and gas prospects. As a
result, Aspect has advanced Esenjay amounts to develop and explore those
prospects. The entities have no common ownership or interests outside of
said prospects.
49
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil reserves. The Company also has engaged in
the acquisition, production, development and marketing of natural gas and oil.
The Company's early growth was through acquisitions of natural gas reserves
principally in the mid-continent area of Arkansas, Kansas, Oklahoma and Texas.
In recent years, however, the Company's business activities have focused more on
exploration and related developmental drilling projects in southern Louisiana
and along the Gulf Coast of Alabama, Mississippi and Texas. The Company's
current business objective is to increase its reserves by drilling natural gas
and oil wells on prospects identified and developed through the use of well
correlations, Computer Aided Exploration ("CAEX") technologies and 3-D seismic
surveys.
The description of the business and properties set forth below is primarily
a description of the Company's historical and current business before
consummation of the Acquisitions. If the Acquisitions are closed, the emphasis
of the Company's business and properties will, in addition to the spread of
risk, have shifted significantly toward moderate depth exploration projects
located along the Texas Gulf Coast. Special emphasis will be placed upon natural
gas oriented prospects often delineated by the presence of seismic hydrocarbon
indicators.
In 1997 the Company was confronted with several issues that resulted in the
substantial depletion of its cash resources. Most significantly, the Company
lost substantial revenues in 1996 due to the premature loss of production in its
Mobile Bay area wells due to water encroachment. The Company also experienced
significant delays in drilling on its Starboard Project. It responded by
participation in a series of primarily third party originated projects, many of
which were not confirmed by 3-D seismic data, and which drilling resulted in
very poor results and minimal cash flow. The Board then directed the Company to
seek a strategic business combination. After a significant search the Company
entered into the Acquisition Agreement, which if consummated, will result in
substantial changes in the Company's nature and scope. Management and the Board
believe these changes will position the Company to effectively pursue its
business strategy. If the agreements are not consummated, the Company would have
to seek other partners or sell a majority of its project inventory to survive.
The Company will substantially increase the scope and diversity of its
portfolio of projects upon consummation of the Acquisitions. The acquired assets
include substantial working interests in 28 exploration projects, almost all of
which are natural gas oriented, located primarily along the Texas Gulf Coast.
Most of the projects have been, are being, or will be enhanced with 3-D seismic
data and CAEX technologies. The Acquisitions include leases or options in over
280,000 gross acres. The 3-D seismic data acquired will, when complete, cover
approximately 1,500 square miles and will all have been shot and initially
processed since November 1996. Drilling operations have commenced on four of the
exploration projects to be acquired by the Company with substantial drilling
anticipated through the remainder of this year.
If the Acquisitions are consummated, the Company will have a significant
number of projects that have reached the initial drilling stage, and the Company
expects to spend over $25 million net to its interest in exploratory drilling
during the following 12 months on over 30 wells. Management believes the Company
then will represent a focused investment opportunity on a diverse array of
technology enhanced, 3-D seismic confirmed, ready to drill natural gas oriented
projects.
The Company's strategy will be to use 3-D seismic and CAEX technologies to
attempt to reduce the exploration risk on a significant spread of natural gas
oriented projects. The Company's focus will be on certain trends along the Texas
and Louisiana Gulf Coast that have a demonstrated history of prolific natural
gas production from excellent quality reservoir rocks and that the Company
believes have a profile suitable for the addition of value through seismic
evalution. The Company believes such trends are prone
50
<PAGE>
to direct detection of hydrocarbons through the use of 3-D seismic data. The
objective will be to further reduce risk by drilling at depths deep enough to
discover sizable gas accumulations (generally below 8,000 to 12,500 feet), but
not so deep as to be highly exposed to the greater mechanical risks and drilling
costs incurred in the deep plays in the region. Unlike the Gulf of Mexico, where
3-D seismic data typically are owned and licensed by many companies that compete
intensely for leases, the private right of ownership of onshore mineral rights
makes it possible for individual exploration companies to proprietarily control
the seismic data in focused core areas. A significant element of the Company's
strategy will be to acquire substantial amounts of proprietary 3-D seismic data
and significant acreage positions in order to seek to achieve a dominant
position in its focused core areas. This strategy will be represented in the
Company's project inventory if the Acquisitions are consummated.
Before consummation of the Acquisitions, the Company's most significant
project was its Starboard Project located in Terrebonne Parish, Louisiana. The
Starboard Project is comprised of a group of distinct exploration prospects as
well as proved undeveloped locations. The Company has devoted over three years
to this project, which consists of mineral leases and options and a proprietary
3-D seismic survey over the Lapeyrouse Field. Project partners include Fina Oil
and Chemical Company and others, although the Company is the largest working
interest owner. Initial exploratory drilling based upon 3-D seismic and CAEX
analysis should begin by mid-1998. The consummation of the Acquisitions will
make the Company substantially less dependent upon the success or failure of the
Starboard Project, and spread its opportunities and risks over an array of
technology enhanced projects in a number of exploration trends.
In addition to the Acquisitions, and in conjunction with them, the Company
will hire most of Esenjay's employees, including Michael E. Johnson as a
director, President and CEO. It also will revamp its Board of Directors with
several additions, including Alex Cranberg as its Vice-Chairman. The Company
believes these additions will significantly strengthen its technical resources
and its overall management.
In 1997 the Company implemented a drilling program it considered to be
aggressive. In the first nine months of 1997, the Company participated in five
dry holes and one unsuccessful sidetrack operation on South Louisiana prospects.
It also participated in a dry hole in Mobile Bay, Alabama. The Company did,
however, participate in two successful completions in Garvin County, Oklahoma,
resulting from 3-D seismic data. No drilling was conducted in the fourth
quarter. These results, coupled with limited capital resources, caused the
Company to primarily focus on its Starboard Project and to look at potential
consolidation opportunities. In this regard, it looked at potential asset
acquisitions using stock and other potential opportunities, including business
consolidations in order to increase efficiencies and exploration capital.
As a result of its search for an appropriate business combination
transaction, the Company entered into the Acquisition Agreement. Upon
consummation of the transactions contemplated by the Acquisition Agreement,
Esenjay and Aspect or its assignees would own an aggregate of approximately
85.93% of the issued and outstanding Common Stock. If the Company does not close
the transaction set forth in the Acquisition Agreement, or find alternative
sources of capital, or sell substantial interests in its prospect inventory, it
will not have adequate liquidity to fund ongoing operations.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through several current activities, including (i) the
Acquisitions; (ii) generation of prospects with its existing partners; (iii)
identification of "bright spot" seismic anomalies; (iv) acquisition of acreage
on additional high potential Gulf Coast exploration projects identified by the
Company; and (v) evaluation of technology enhanced exploration prospect
opportunities in Gulf Coast areas.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company, either directly or through its partners, uses CAEX technology
to collect and analyze geological, geophysical, engineering, production and
other data obtained about potential gas or oil prospects. The Company uses this
technology to correlate density and sonic characteristics of subsurface
51
<PAGE>
formations obtained from 2-D seismic surveys with like data from similar
properties, and uses computer programs and modeling techniques to determine the
likely geological composition of a prospect and potential locations of
hydrocarbons.
Once all available data has been analyzed to determine the areas with the
highest potential within a prospect area, the Company may conduct 3-D seismic
surveys to enhance and verify the geological interpretation of the structure,
including its location and potential size. The 3-D seismic process produces a
three-dimensional image based upon seismic data obtained from multiple
horizontal and vertical points within a geological formation. The calculations
needed to process such data are made possible by computer programs and advanced
computer hardware.
While large oil companies have used 3-D seismic and CAEX technologies for
approximately 20 years, these methods were not affordable by smaller,
independent gas and oil companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. The Company began using 3-D seismic and CAEX technologies in 1992
and is using these technologies on a continuing basis. The Company believes that
its use of CAEX and 3-D seismic technology may provide it with certain
advantages in the exploration process over those companies that do not use this
technology. These advantages include better delineation of the subsurface, which
can reduce exploration risks and help optimize well locations in productive
reservoirs. The Company believes these advantages can be readily validated based
upon general industry experience as well as the experiences of Aspect and
Esenjay. Because computer modeling generally provides clearer and more accurate
projected images of geological formations, the Company believes it is better
able to identify potential locations of hydrocarbon accumulations and the
desirable locations for wellbores. However, the Company has not used the
technology extensively enough to arrive any conclusion regarding the Company's
ability to interpret and use the information developed from the technology.
EXPLORATION AND DEVELOPMENT
The Company considers the Gulf Coast to be the premier area in the United
States to explore for significant new reserves. This conclusion is based on
several characteristics including (i) a large number of productive intervals
throughout a significant sedimentary section, (ii) numerous wells with which to
calibrate 3-D seismic data and (iii) complicated geological formations that the
Company believes 3-D seismic technology is particularly well suited to
interpret. In 1994, the Company began devoting more of its energy to the Gulf
Coast region. The Company initially entered this area by evaluating the onshore
shallow Frio/Miocene Trend. Its emphasis expanded to include larger exploration
targets represented by large geological features such as those present in the
Starboard Project. If the Acquisitions are consummated, its exploration project
inventory will be along the Gulf Coast of Texas, Louisiana, Alabama and
Mississippi. The focus will be on natural gas exploration prospects with a
numerical concentration along the Texas Gulf Coast, many of which were
delineated by seismic hydrocarbon indicators. Additional 2-D and 3-D seismic
surveys may be required to evaluate these areas more fully, and when determined
appropriate, the Company intends to acquire acreage and drill wells as indicated
by the evaluations.
The Company intends to drill prospects where the formations being tested are
known to be productive in the general area and where it believes 3-D seismic can
be used to increase resolution and thereby reduce risk. The extent to which the
Company will pursue its activities in the Gulf Coast region will be determined
by the availability of the Company's resources and the availability of joint
venture partners.
The Starboard Project is comprised of a group of exploration prospects as
well as proved undeveloped locations. A 3-D seismic survey funded by Fina Oil
and Chemical Company and its partners has been shot and processed.
Interpretation began in March 1997 and the initial 3-D seismic data evaluated
drill sites have been selected.
The interests to be acquired pursuant to the Acquisition Agreement, which
generally are natural gas oriented, are of such diversity and scope that the
Company's projects will be substantially diversified if the
52
<PAGE>
Acquisitions are closed. The projects acquired will make the Company
substantially less dependent upon the success or failure of its Starboard
Prospect.
ACQUISITIONS AND DIVESTMENTS
The Company has periodically acquired producing natural gas and oil
properties. In connection with each acquisition, the Company considers (i)
current and historic production levels and reserve estimates, (ii) exploitation;
(iii) capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transportation
capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity and whether the
acquisition will improve the operations of other acquired properties. Evaluation
of the merits of a particular acquisition is based, to the extent relevant, on
all of the above factors as well as other factors deemed relevant by the
Company's management.
The Company has currently de-emphasized its producing property acquisition
activities. If the Acquisitions are consummated, the Company intends to limit
its near term producing property acquisitions to opportunities that facilitate
its exploration activities. The Company may readdress this approach if it
identifies an opportunity it believes to be of exceptional benefit to its
shareholders.
In September 1996, the Company completed the sale of its N.E. Cedardale
field in Major County Oklahoma to OXY USA, Inc., for consideration totaling
$3,550,000. The properties sold represented a substantial portion of the
Company's Oklahoma production. The divestiture of the Oklahoma properties
further facilitated the Company's focus of its resources on its Gulf Coast
projects and reduced debt service requirements over the next three years in an
amount greater than the anticipated net revenue from the properties sold. The
sale included cash of $2,840,000 and certain exchange properties that were
concurrently sold to a third party for $710,000, netting the Company $3,550,000.
HEDGING ACTIVITIES AND MARKETING
The Company markets its natural gas through monthly spot sales. Because
sales made under spot sales contracts result in fluctuating revenues to the
Company depending upon the market price of gas, the Company may enter into
various hedging agreements to minimize the fluctuations and the effect of price
declines or swings. During January 1996, the Company, as required by a bank
credit agreement, entered into a swap agreement on 62,500 MMBtu of its monthly
mid-continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999. The swap, which is the
Company's only current hedge, was reduced to 31,250 MMBtu on September 25, 1996,
in connection with the sale of the N.E. Cedardale field. The Company recorded a
loss of $212,000 on this swap reduction. The Company's net gas production
currently is less then the volumes hedged. As of December 31, 1997 the Company
had an accrued liability of $128,936 to recognize the projected loss from the
hedges. The Company has not recently conducted an active hedging program other
than as required by the Credit Agreement. In that regard, the Company had net
losses of $814,029 in 1996, which includes the $212,000 loss on the swap
reductions, and $375,410 in 1997 on its required hedged positions.
All of the Company's oil production is now sold under market-sensitive or
spot price contracts. The Company's revenues from oil sales fluctuate depending
upon the market price of oil. No purchaser accounted for more than 10% of the
Company's total revenue in 1996 or 1997. The Company does not believe the loss
of any existing purchaser would have a material adverse effect on the Company.
In December 1991, the Company entered into and performed under a seven-year
fixed price contract with an industrial end-user, Waldorf Corporation, for the
delivery of 7.1 Bcf of natural gas. The contract included certain prepayments to
the Company. The agreement was satisfied in January 1996 when the Company
entered into an agreement with Waldorf to terminate the agreement as of January
31, 1996. The Company paid Waldorf $2,181,489, which represents a return of
Waldorf's advance on 2,490,103 MMBTU's of natural gas, plus a settlement payment
of $313,912. The Company has been able to sell all
53
<PAGE>
natural gas production to other sources at equal or higher prices since the
termination of the contract. The Company anticipates that it will be able to
continue to sell all available natural gas production in the foreseeable future.
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in four states
with proved reserves located primarily in Louisiana, Oklahoma and Texas. The
Company currently owns interests in six wells it operates and also owns
non-operated interests in approximately 27 producing wells in Oklahoma,
Louisiana and Texas. Daily production from both operated and non-operated wells
net to the Company's interest averaged 332.34 Mcf per day and 19.96 Bbls of oil
per day for the year ended December 31, 1997. These properties have provided the
Company's revenues to date.
GAS AND OIL RESERVES
Set forth below is certain information concerning the Company's net proved
reserves, projected future production, estimated future net revenue from proved
reserves and the present value of such estimated net revenue as of the dates set
forth below. The estimates were based upon a review of production histories and
other geologic, economic, ownership and engineering data. In determining the
estimates of the reserve quantities that are economically recoverable, the
Company used selling prices and estimated development and production costs in
effect as of the dates of such estimates and, where no prior sales existed,
selling prices and production costs of comparable wells in the general area were
used. In accordance with guidelines promulgated by the Commission, no price or
cost escalation or deescalation was considered. The information set forth below
does not include the Esenjay Assets or the Aspect Assets.
ESTIMATED PROVED RESERVES. The following table sets forth summary
information regarding the Company's gas and oil reserves at December 31, 1997.
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE)(1)
---------- --------- ----------
<S> <C> <C> <C>
Proved developed reserves................................ 521,345 24,358 667,493
Proved undeveloped reserves.............................. 4,979,018 90,041 5,519,264
Total proved reserves.................................... 5,500,363 114,399 6,186,757
</TABLE>
- ------------------------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas and
oil.
ESTIMATE OF FUTURE NET REVENUE FROM PROVED RESERVES. The following table
sets forth summary information regarding estimated future net revenue and the
present value of future net revenue from the Company's net proved reserves as of
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Estimated total future net revenue(1)........................................... $8,283,153
Present value of future net revenue(2).......................................... $4,025,657
</TABLE>
- ------------------------
(1) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect as
of the date indicated. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax expense or to depreciation, depletion and
amortization.
(2) Present value is calculated by discounting estimated future net revenue by
10% annually.
54
<PAGE>
DRILLING ACTIVITY
The Company drilled only one well in each of 1991, 1992 and 1993, and each
of such wells were productive. In 1994, the Company drilled five exploratory
wells, of which four were productive, and one developmental well, which was not
productive. In 1995, the Company drilled seven exploratory wells of which four
were productive. In 1996, the Company participated in the drilling of four
Garvin County, Oklahoma, wells of which two were productive. In 1997, the
Company participated in eight wells, drilled one sidetrack operation in an
existing wellbore, which operations have resulted in two successful completions,
six dry holes, and one unsuccessful sidetrack operation due to mechanical
difficulties.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of December 31, 1997 of productive gas and oil wells in the areas
indicated.
<TABLE>
<CAPTION>
GAS OIL
---------------------- ----------------------
GROSS NET GROSS NET
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma........................................................ 5 .04 8 .20
Texas........................................................... 1 0.07 5 2.22
Louisiana....................................................... 2 0.79 0 0
Kansas.......................................................... 1 0.10 0 0
--- --- --- ---
Total....................................................... 9 1.00 13 2.42
--- --- --- ---
--- --- --- ---
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1997
---------- ---------
<S> <C> <C>
Net Production:
Oil (Bbl)........................................................... 9,276 7,286
Gas (Mcf)........................................................... 1,406,016 121,304
Gas equivalent (Mcfe)............................................... 1,461,672 165,020
Average sales price:
Oil ($ per Bbl)..................................................... $20.99 $20.28
Gas ($ per Mcf)..................................................... $ 2.18 $ 2.06
Average production expenses and taxes ($ per Mcfe).................. $ 0.78 $ 2.13
</TABLE>
- ------------------------
(1) Includes $164,792 in costs associated with fulfillment of contractual
transportation obligations on the Company's Mobil Bay Properties. If this
amount were not included, the average production taxes and excess for Mcfe
would have been $1.13.
55
<PAGE>
LEASEHOLD ACREAGE
The following table sets forth as of December 31, 1997, the gross and net
acres of proved developed and proved undeveloped gas and oil leases which the
Company holds or has the right to acquire.
<TABLE>
<CAPTION>
PROVED PROVED UNDEVELOPED
DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
- ------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Oklahoma............................................... 38,606 14,091 1,370 452
Texas.................................................. 10,742 1,999 54 54
Alabama................................................ 5,156 4,877 5,710 1,805
Arkansas............................................... 1,672 357 6,360 2,544
Louisiana.............................................. 1,474 449 4,075 3,397
Kansas................................................. 1,600 126
--------- --------- --------- ---------
Total.............................................. 59,250 21,899 17,569 8,252
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
COMPETITION
The gas and oil industry is highly competitive in all of its phases. The
Company encounters strong competition from other gas and oil companies in all
areas of its operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the marketing
of gas and oil. Many of these competitors possess greater financial, technical
and other resources than the Company. Competition for the acquisition of
producing properties is affected by the amount of funds available to the
Company, information about producing properties available to the Company and any
standards the Company establishes from time to time for the minimum projected
return on investment. Competition also may be presented by alternative fuel
sources, including heating oil and other fossil fuels, There has been increased
competition for lower risk development opportunities and for available sources
of financing. In addition, the marketing and sale of natural gas and processed
gas are competitive. Because the primary markets for natural gas liquids are
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.
REGULATION
GENERAL. The gas and oil industry is extensively regulated by federal,
state and local authorities. In particular, gas and oil production operations
and economics are affected by price controls, environmental protection statutes,
tax statutes and other laws and regulations relating to the petroleum industry,
as well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other reasons.
Numerous regulatory authorities, federal, and state and local governments issue
rules and regulations binding on the gas and oil industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the gas
and oil industry increases the Company's cost of doing business and,
consequently, affects its profitability. The Company believes it is in
compliance with all federal, state and local laws, regulations and orders
applicable to the Company and its properties and operations, the violation of
which would have a material adverse effect on the Company or its financial
condition.
SEISMIC PERMITS. Current law in the State of Louisiana requires permits
from owners of at least an undivided 80% interest in each tract over which the
Company intends to conduct seismic surveys. As a result, the Company may not be
able to conduct seismic surveys covering its entire area of interest.
56
<PAGE>
Moreover, 3-D seismic surveys typically are conducted from various locations
both inside and outside the area of interest to obtain the most detailed data of
the geological features within the area. To the extent that the Company is
unable to obtain permits to access locations to conduct the seismic surveys, the
data obtained may not be as detailed as might otherwise be available.
EXPLORATION AND PRODUCTION. The Company's operations are subject to various
regulations at the federal, state and local levels. Such regulations include (i)
requiring permits for the drilling of wells; (ii) maintaining bonding
requirements to drill or operate wells; and (iii) regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with well operations. The
Company's operations also are subject to various conservation regulations. These
include the regulation of the size of drilling and spacing units, the density of
wells that may be drilled, and the unitization or pooling of gas and oil
properties. In addition, state conservation laws establish maximum rates of
production from gas and oil wells, generally prohibiting the venting or flaring
of gas, and impose certain requirements regarding the ratability of production.
The effect of these regulations is to limit the amount of gas and oil the
Company can produce from its wells and to limit the number of wells or the
locations at which the Company can drill. Recently enacted legislation and
regulatory action in Texas and Oklahoma is intended to reduce the total
production of natural gas in those states. Although such restrictions have not
had a material impact on the Company's operations to date, the extent of any
future impact therefrom cannot be predicted.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal legislation
and regulatory controls in the United States have historically affected the
price of the natural gas produced by the Company and the manner in which such
production is marketed. The transportation and sale for resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
("FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act of 1978
("NGPA"). The maximum selling prices of natural gas were formerly established
pursuant to regulation. However, on July 26, 1989, the Natural Gas Wellhead
Decontrol Act of 1989 ("Decontrol Act") was enacted, which terminated wellhead
price controls on all domestic natural gas on January 1, 1993 and amended the
NGPA to remove completely by January 1, 1993 price and nonprice controls for all
"first sales" of natural gas, which will include all sales by the Company of its
own production. Consequently, sales of the Company's natural gas currently may
be made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and pricing of natural gas. Commencing in April 1992, the
FERC issued Order Nos. 636, 636-A and 636-B (collectively, "Order No. 636"),
which, among other things, require interstate pipelines to "restructure" their
services to provide transportation separate or "unbundled" from the pipelines'
sales of gas. Also, Order No. 636 requires interstate pipelines to provide
open-access transportation on a basis that is equal for all gas supplies. Order
No. 636 has been implemented through decisions and negotiated settlements in
individual pipeline services restructuring proceedings. In many instances, the
result of Order No. 636 and related initiatives have been to substantially
reduce or eliminate the interstate pipelines' traditional role as wholesalers of
natural gas in favor of providing only storage and transportation services. The
FERC has issued final orders in virtually all pipeline restructuring
proceedings, and has now commenced a series of one year reviews to determine
whether refinements are required regarding he implementation by individual
pipelines Order No. 636. In July 1996, the United States Court of Appeals for
the District of Columbia Circuit largely upheld Order No. 636.
57
<PAGE>
Although Order No. 636 does not regulate natural gas production operations,
the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts.
Although Order No. 636 could provide the Company with additional market access
and more fairly applied transportation service rates, terms and conditions, it
could also subject the Company to more restrictive pipeline imbalance tolerances
and greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction, the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market, and the use of negotiated and market-based
rates and terms and conditions for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the FERC's
stated intention is to further enhance competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the operations of
the Company. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute, the
party transferring the oil field site shall not thereafter be held liable by the
state for any site restoration costs or actions associated with the transferred
oil field site. The parties to a transfer may elect not to establish a site-
specific trust account, however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restoration
of the site. If the parties to a transfer elect to establish a site-specific
trust account pursuant to the statute, the Louisiana Department of Natural
Resources ("DNR") requires an oil field site restoration assessment to be made
at the time of the transfer or within one year thereafter, to determine the site
restoration requirements existing at the time of transfer. Based upon the site
restoration assessment, the parties to the transfer must propose to the DNR a
funding schedule for the site-specific trust account, providing for some
contribution to the account at the time of transfer and at least quarterly
payment thereafter. If the DNR approves the establishment and funding of the
site-specific trust account, the purchaser will thereafter be the responsible
party to the state, except that the failure of a transferring party to make a
good faith disclosure of all oil field site conditions existing at the time of
the transfer will render that party liable for the costs of restoration of such
undisclosed conditions in excess of the balance of the site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. Sales of crude oil, condensate and gas
liquids by the Company are not regulated and are made at market prices. The
price the Company receives from the sale of these products is affected by the
cost of transporting the products to market. Effective as of January 1, 1995,
the FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which would generally index such rates
to inflation, subject to certain conditions and limitations. These regulations
could increase the cost of transporting crude oil, liquids and condensate by
pipeline. These regulations are subject to pending petitions for judicial
review. The Company is not able to predict with certainty what effect, if any,
these regulations will have on it, but other factors being equal, the
regulations may tend to increase transportation costs or reduce wellhead prices
for such commodities.
58
<PAGE>
ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental agencies,
such as the Environmental Protection Agency ("EPA"), issue regulations to
implement and enforce such laws, which often require difficult and costly
compliance measures that carry substantial civil and criminal penalties for
failure to comply. These laws and regulations may require the acquisition of a
permit before drilling commences, restrict the types, quantities and
concentrations of various substances that can be released into the environment
in connection with drilling and production activities, limit or prohibit
drilling activities on certain lands lying within wilderness, wetlands,
ecologically sensitive and other protected areas, require some form of remedial
action to prevent pollution from former operations, such as plugging abandoned
wells, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws, rules and regulations may
restrict the rate of oil and natural gas production below the rate that would
otherwise exist. The regulatory burden on the oil and gas industry increases the
cost of doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, disposal or cleanup requirements
could adversely affect the Company's operations and financial position, as well
as those of the oil and gas industry in general. While management believes that
the Company is in substantial compliance with current applicable environmental
laws and regulations and the Company has not experienced any material adverse
effect from compliance with these environmental requirements, there is no
assurance that this will continue in the future.
The primary environmental statutory and regulatory programs that affect the
Company's operations include the following:
The Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), also known as "Superfund," imposes liability without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to be responsible for the release of a "hazardous substance"
into the environment. These persons include (i) the current owner and operator
of a facility from which hazardous substances are released, (ii) owners and
operators of the facility at the time the disposal of hazardous substances took
place, (iii) generators of hazardous substances who arranged for the disposal or
treatment at or transportation to such facility of hazardous substances and (iv)
transporters of hazardous substances to disposal or treatment facilities
selected by them.
Under CERCLA, such persons may be subject to joint and several liability for
the costs of cleaning up the hazardous substances that have been released into
the environment, for damages to natural resources and for the costs of certain
health studies, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other pollutants into the
environment. Furthermore, although petroleum, including crude oil and natural
gas, is exempt from CERCLA, at least two courts have ruled that certain wastes
associated with the production of crude oil may be classified as "hazardous
substances" under CERCLA, and thus such wastes may become subject to liability
and regulation under CERCLA. Regulatory programs aimed at remediation of
environmental releases could have a similar impact on the Company.
The Federal Water Pollution Control Act of 1972 ("FWPCA") as amended, also
known as the Clean Water Act ("CWA"), imposes restrictions and strict controls
regarding the discharge of pollutants including produced waters and other oil
and gas wastes, into waters of the United States (as defined in the CWA). The
discharge of pollutants into regulated waters is prohibited, except in accord
with the terms of a permit issued by EPA or the state. These proscriptions also
prohibit certain activity in wetlands unless authorized by a permit issued by
the U.S. Army Corps of Engineers. Sanctions for unauthorized discharges include
administrative, civil and criminal penalties, as well as injunctive relief.
59
<PAGE>
The Oil Pollution Act of 1990 ("OPA") amends certain provisions of the CWA,
and other statutes as they pertain to the prevention of and response to spills
or discharges of hazardous substances or oil into navigable waters. Under OPA, a
person owning or operating a facility or equipment (including land drilling
equipment) from which there is a discharge or threat of a discharge of oil into
or upon navigable waters or adjoining shorelines is liable, regardless of fault,
as a "responsible party" for removal costs and damages. Federal law imposes
strict, joint and several liability on facility owners for containment and
clean-up costs and certain other damages, including natural resource damages,
arising from a spill.
The EPA is also authorized to seek preliminary and permanent injunctive
relief and, in certain cases, criminal penalties and fines. State laws governing
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. In the event that a discharge occurs at a
well site at which the Company is conducting production operations, the Company
may be exposed to claims that it is liable under OPA, the CWA or similar state
laws.
The Resource Conservation and Recovery Act ("RCRA"), as amended, generally
does not regulate most wastes generated by the exploration and production of oil
and gas. RCRA specifically excludes from the definition of hazardous waste
"drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." However, these wastes may be regulated by EPA or state agencies as
solid waste. Moreover, ordinary industrial wastes, such as paint wastes, waste
solvents, laboratory wastes, and waste compressor oils, may be regulated as
hazardous waste. Pipelines used to transfer oil and gas may also generate some
hazardous wastes. Although the costs of managing solid and hazardous waste may
be significant, the Company does not expect to experience more burdensome costs
than similarly situated companies involved in oil and gas exploration and
production.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the gas and oil industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations including a title opinion of local counsel generally are made
before commencement of drilling operations. The Company has granted to an
affiliate of a major public utility a mortgage on its interest in the Starboard
Project to secure repayment of the funding provided by the affiliate and
relating to the prospect, and has granted to Bank of America Illinois a mortgage
on virtually all remaining producing gas and oil properties to secure repayment
under the Credit Agreement. The Company has also granted a mortgage on certain
properties, including the Esenjay Assets and the Aspect Assets, to secure the
financing provided by the New Credit Facility.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
The Company maintains a gas and oil lease operator insurance policy that
insures the Company against certain sudden and accidental risks associated with
drilling, completing and operating its wells.
60
<PAGE>
There can be no assurance that this insurance will be adequate to cover any
losses or exposure to liability. The Company also carries comprehensive general
liability policies and an umbrella policy. The Company and its subsidiaries
carry workers' compensation insurance in all states in which they operate. The
Company maintains various bonds as required by state and federal regulatory
authorities. Although the Company believes these policies are customary in the
industry, they do not provide complete coverage against all operating risks. An
uninsured or partially insured claim, if successful and of sufficient magnitude,
could have a material adverse effect on the Company and its financial condition.
If the Company experiences significant claims or losses, the Company's insurance
premiums could be increased, which may adversely affect the Company and its
financial condition, or limit the ability of the Company to obtain coverage. Any
difficulty in obtaining coverage may impair the Company's ability to engage in
its business activities.
FACILITIES
The Company leases approximately 7,600 square feet of office space in
Houston, Texas, at an annual rent of $117,068. The lease expires in September
2001. In connection with the Acquisitions, the Company will assume a lease (the
"Lease") of Esenjay for 8,242 square feet of office space in Corpus Christi,
Texas. The monthly rent is $7,555, and the Lease expires on June 30, 1998. The
Company currently is leasing more office space than it needs, and intends to
sublet a portion of its office space in 1998.
EMPLOYEES
The Company has seven full-time and two part-time employees in its Houston,
Texas office. Their functions include management, production, geology,
geophysics, land, legal, gas marketing, accounting, financial planning and
administration. Certain operations of the Company's field activities are
accomplished through independent contractors who are supervised by the Company.
The Company believes its relations with its employees and contractors are good.
No employees of the Company are represented by a union.
LEGAL PROCEEDINGS
Esenjay was a defendant in a lawsuit regarding injuries to a former employee
that resulted in a judgment against Esenjay of approximately $17,700,000. The
judgment was settled by Esenjay's insurers, who agreed to make cash payments to
the plaintiff, and by Esenjay who agreed to implement a mutually agreeable work
safety plan. The settlement was entered into and approved by the court entering
an agreed judgment on December 3, 1997. On approximately April 16, 1998, the
plaintiff filed an action against both Esenjay and the Company alleging, in
part, that Esenjay has failed and refused to implement an appropriate safety
plan and entered negotiations with the Company to convey material assets to it
which, if consummated, would negate plaintiffs benefits to be obtained by
Esenjay's safety plan, thereby fraudulently inducing plaintiff to settle the
judgment against Esenjay. The Company believes the claims are not supported by
the facts and are without merit. The Company and Esenjay intend to vigorously
defend the claims.
61
<PAGE>
MARKET AND DIVIDEND DATA
The Company's Common Stock is traded on the Nasdaq Small-Cap Market under
the symbol "FNGC". At April 1, 1998, the Company estimates there are
approximately 84 common shareholders of record and 2,337 beneficial owners of
the Common Stock.
For the periods indicated below, the following table sets forth the range of
high and low sales prices for the Company's Common Stock, as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
CALENDAR YEAR 1996
First Quarter....................................................... $ 2-11/16 $ 1-27/64
Second Quarter...................................................... $ 2-11/16 $ 1-7/8
Third Quarter....................................................... $ 2-3/4 $ 1-5/8
Fourth Quarter...................................................... $ 2-15/16 $ 2
CALENDAR YEAR 1997
First Quarter....................................................... $ 3-9/16 $ 2-1/16
Second Quarter...................................................... $ 2-3/8 $ 1-11/16
Third Quarter....................................................... $ 2 $ 5/8
Fourth Quarter...................................................... $ 2 $ 11/16
CALENDAR YEAR 1998
First Quarter....................................................... $ 1-3/16 $ 11/16
Second Quarter (through April 21, 1998)............................. $ 1-1/16 $ 23/32
</TABLE>
The closing price of the Common Stock on January 21, 1998, the day before
the public announcement of the execution of the Acquisition Agreement, was
$1.031.
62
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical information of the
Company for the two years ended and as of December 31, 1997. Selected Financial
Data should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the related notes thereto included elsewhere in
this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and Gas Revenues(a)......................................... $ 3,176,861 $ 664,126
Operating fees.................................................. 213,834 55,021
Other revenues(b)............................................... (223,903) 189,462
------------- -------------
Total revenues................................................ 3,166,792 908,609
------------- -------------
Lease operating expenses........................................ 556,925 427,240
Production taxes................................................ 207,969 24,497
Transportation and gathering.................................... 368,716 143,265
DD&A(c)......................................................... 2,237,648 315,880
Impairment of oil and gas properties(d)......................... 51,000 349,384
Exploration costs(e)............................................ 1,317,161 2,258,702
Delay rentals(f)................................................ -- 211,690
Interest expense................................................ 783,872 60,942
General and administrative...................................... 2,217,099 2,070,812
Other expenses(g)............................................... 451,421 --
------------- -------------
Total expenses................................................ 8,191,811 5,862,412
------------- -------------
Net loss...................................................... (5,025,019) (4,953,803)
Cumulative preferred stock dividend............................. 103,153 103,153
------------- -------------
Net loss applicable to common stockholders...................... $ (5,128,172) $ (5,056,956)
------------- -------------
------------- -------------
Net loss per share............................................ $ (0.72) $ (0.51)
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(h)...................................... $ 4,956,656 $ 690,576
Property and equipment, net....................................... 3,435,924 3,144,370
Total assets...................................................... 9,631,192 4,576,008
Long-term debt (including current maturities)..................... 1,311,552 1,297,683
Stockholders' equity.............................................. 6,738,826 1,804,820
</TABLE>
- ------------------------
Notes to Selected Financial Data
(a) Oil and gas revenues decreased from $3.2 million in 1996 to $.7 million in
1997 primarily due to ceased production from the Mobile Bay wells and the
sale of producing properties.
(b) Other revenues increased from ($.2) million in 1996 to $.2 million in 1997
primarily due to the gain on the sale of assets and a decrease in realized
losses on commodity transactions.
(c) Depletion, Depreciation, and Amortization decreased from $2.2 million in
1996 to $.3 million in 1997 primarily due to the abandonment of previously
producing wells in the Mobile Bay prospect.
63
<PAGE>
(d) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
wells in the Mobile Bay prospect.
(e) Exploration costs and delay rentals increased from $1.3 million in 1996 to
$2.5 million in 1997 primarily due to the dry holes drilled in 1997.
(f) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997.
(g) 1996 includes other expense items for the purchase and settlement of
deferred gas contracts. There were no such expenses during 1997.
(h) Cash and cash equivalents decreased from $5.0 million in 1996 to $.7 million
primarily due to the operating loss incurred during 1997.
64
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the years ended December 31, 1997 and 1996 and should be read in conjunction
with its consolidated financial statements and related notes thereto.
OVERVIEW
In mid-1996, the Company refocused its activities from acquiring gas
reserves principally in the Mid-Continent region of the United States to
concentrate on exploration and related development drilling projects in Southern
Louisiana and along the Gulf Coast region of Alabama, Mississippi and Texas. The
Company's most significant interest in the Gulf Coast region is the Starboard
Project, which is comprised of a group of exploration prospects as well as
undeveloped locations.
During 1996 and 1997, the Company's drilling activities, which were based
significantly on 2-D seismic data, were unsuccessful. This unsuccessful drilling
activity, along with an unexpected drop in production from the Company's Mobile
Bay area wells, reduced the Company's cash and capital resources at the time the
drilling phase of the Starboard Project was approaching. To address the
Company's capital needs for the Starboard Project and other activities, the
Board of Directors, at its meeting on August 12, 1997, directed management to
look for potential assets to acquire in exchange for the Company's Common Stock,
to identify and review potential business consolidation opportunities, identify
potential partners to help fund the Company's proposed drilling activities on
the Starboard Project and in other locations, and to consider any other avenues
to strengthen the Company's capital resources and diversify its exploration
opportunities. The Board also directed management to reduce overhead wherever
prudently possible and the Company retained an investment advisor to aid in
achieving these objectives.
To better the position the Company to enter into a potential transaction,
the Company called a special shareholders meeting to increase its authorized
Common Stock from 20,000,000 to 40,000,000 shares. The Company's shareholders
approved the increase on October 20, 1997. The Board also determined to not
further extend any existing employment contracts with senior management, and to
settle any deferred compensation liabilities with those individuals, to create
more flexibility in all appropriate alternatives for strategic consolidations.
The Company, in conjunction with its investment advisor, began reviewing
sources of capital and consolidation candidates, and where appropriate, entered
preliminary discussions to identify those candidates that the Company considered
most attractive and that had a similar interest in pursuing negotiations.
The Company explored a series of such transactions and ultimately management
brought four proposals to its Board of Directors. The Board, after receipt of
the advice of management and its investment adviser, and receipt of due
diligence reports and other materials, unanimously agreed that the transaction
with Aspect and Esenjay was the best option for the Company's shareholders. The
Acquisition Agreement was executed January 19, 1998, and is subject to, among
other items, approval by the Company's shareholders. The Company's ongoing
business plan is substantially dependent upon approval of the Acquisitions by
its shareholders and the closing of the Acquisitions. If closed, the Company
will convey a substantial majority of its Common Stock to acquire an array of
significant technology enhanced natural gas oriented exploration projects, many
of which are ready to drill. The Company believes the Acquisitions will
facilitate expanded access to capital markets due to the value and diversity of
its exploration project portfolio. The Company also believes the members of
Esenjay's management that will join the Company after consummation of the
Acquisitions will significantly enhance the Company's management team.
Conversely, if the Acquisitions are not closed, the Company would be required to
rapidly find another consolidation, or other capital sources, or sell
substantial interests in its existing exploration projects or it would be unable
to fund ongoing operations.
65
<PAGE>
YEAR 2000
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to identify
other potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. The total costs of connecting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, although no estimates can be made as to the potential adverse impact
resulting from the failure of third party service providers and vendors to
prepare for the year 2000 the Company intends to formulate a plan to deal with
potential year 2000 issues.
COMPARISON OF 1997 TO 1996
REVENUE. Total revenues decreased 71.3% from $3,166,792 for the year ended
December 31, 1996, to $908,609 for the year ended December 31, 1997.
Total gas and oil revenues decreased 79.1% from $3,176,861 to $664,126. The
decrease in gas and oil revenues was primarily attributable to ceased production
from the Mobile Bay wells, which came on stream in December of 1995, and from
the sale of properties discussed below. A contributing factor in the decline in
gas and oil revenues was the sale of the Company's NE Cedardale field located in
Major County, Oklahoma in September 1996. The Company recorded gas and oil
revenues associated with these factors of $2,003,251 for 1996 and $62,471 for
1997. The remainder of this decrease is primarily attributable to sales of other
interests and gas price fluctuations. Operating fees to the Company decreased
from $213,834 for the year 1996 to $55,021 for the year 1997, due to the sale of
a substantial portion of the Company's operated properties. The decrease in gas
and oil revenues was partially offset by an increase in gain on sale of assets
of $201,583 from $250,437 reported for 1996 to $452,020 reported for 1997. The
increase is due to the sell down of certain Company prospects and the sale of
certain Company properties located in Texas, Oklahoma and Arkansas. The Company
realized losses from various commodity transactions totaling $375,410 for the
year ended December 31, 1997. The decrease in the loss is primarily attributable
to the amended swap agreement with Bank of America in September of 1996, which
decreased the volume of the swap agreements. This compares to a realized loss of
$814,029 for the same period 1996. Settlement costs in connection with the
amendment to the swap agreement with Bank of America totaling $212,000 are
included in the 1996 realized losses from commodity transactions. These swap
agreement losses were attributable to various transactions in which the Company
hedged its future gas delivery obligations as a requirement under the Credit
Agreement. The determination of gains or losses is directly affected by the spot
gas prices being higher or lower than the hedge contracts for the same period.
In addition to the realized losses from commodity transactions, the Company
accrued $128,936 for unrealized losses for the year ended December 31, 1997.
This was the amount by which the hedges in place exceeded the production. There
were no accrued losses at December 31, 1996. The Company also had other revenues
of $241,788 for the year ended December 31, 1997 as compared to $339,689 for the
year ended December 31, 1996. The reduction is primarily attributable to reduced
revenues realized from the performance of exploratory and geophysical data
processing on a fee basis. Included in the year ended December 31, 1997 other
revenue is a net gain of $25,794 from the Company's officers deferred
compensation settlement, which was executed on August 15, 1997.
COSTS AND EXPENSES. Total costs and expenses decreased 28.4% from
$8,191,811 in 1996 to $5,862,412 in 1997. Although there were increases in
exploration costs, delay rentals and unrealized loss on commodity transactions,
there were decreases in lease operating expenses, production taxes,
transportation, depreciation, interest expense, cost of settling gas contracts
and futures contracts and general and administrative expenses, which resulted in
the net decrease as more fully described below.
66
<PAGE>
Exploration costs increased 71.5% from $1,317,161 in 1996 to $2,258,702 in
1997. The exploration costs in 1997 reflect $380,464 of charges attributable to
expensed investments, and $1,772,746 of dry hole costs. The increase was due to
increased exploratory drilling.
Delay rental transactions were $211,690 for the year ended December 31,
1997. This increase was primarily attributed to rental obligations of the
Company's Starboard Project. There were no such transactions for the same period
in 1996.
Lease operating expense decreased 23.3% from $556,925 in 1996 to $427,240 in
1997. The reduction in lease operating costs was attributable to the sale of
operated properties including the N.E. Cedardale field sale in September of
1996, and a decline in rework activities. Of the year ended December 31, 1997
total lease operation costs, $99,809 was attributable to plugging and
abandonment costs of the Company's Mobile Bay wells, which were plugged during
1997. Production taxes declined 88.2% from $207,969 in 1996 to $24,497 in 1997
due to reduced production as a result of the sale of certain of the Company's
properties including the N.E. Cedardale field and other properties in Texas,
Arkansas and Oklahoma.
Transportation and gathering costs decreased from $368,716 in 1996 to
$143,265 in 1997. The decrease was almost entirely attributable to the ceased
production of the Mobile Bay wells.
Depletion, Depreciation, and Amortization Expense decreased by 85.9% from
$2,237,648 in 1996 to $315,880 in 1997. The decrease was primarily attributable
to the sale of certain of the Company's properties including the NE Cedardale
field on September 27, 1996.
Interest expense decreased to $60,942 in 1997 from $783,872 in 1996. The
decrease was primarily attributable to the substantial loan principal repayment
made to Bank of America under the Credit Agreement in September of 1996. During
1997, the Company capitalized a large portion of its interest in its ongoing
Starboard Project, which capitalized amounts totaled 107,387 in 1996 and 235,977
in 1997.
Cost of settling gas contracts and futures contracts was attributable to the
settlement of a gas sales contract with Waldorf Corporation ($368,690) and the
settlement of a gas swap agreement, due to a reduction in quantities covered
thereunder in connection with the sale of the N.E. Cedardale field ($212,000)
for the year ended December 31, 1996. The Company incurred no similar costs in
1997.
General administrative expenses decreased by 6.5% from $2,217,099 in 1996 to
$2,070,812 in 1997. This was primarily attributable to overhead reduction
measures initiated during 1997.
Impairment of Oil and Gas Properties increased from $51,000 in 1996 to
$349,384 in 1997. This was primarily due to the abandonment of previously
producing wells, of which $323,353 was attributable to the Company's Mobile Bay
wells.
NET INCOME (LOSS). The net loss decreased from $5,025,019 to $4,953,803 for
the year ended December 31, 1996, and December 31, 1997, respectively. This
decrease was due to the factors discussed above.
The net loss per common share decreased from a net loss of $0.72 per share
in 1996 to a net loss of $0.51 per share in 1997. This is reflective of the
decrease in the net loss of $71,217 from the year ended December 31, 1996 to the
year ended December 31, 1997 and a change in the number of weighed average
equivalent shares outstanding. As a result of the Common Stock offering that was
finalized on August 14, 1996, there were approximately 9,877,000 weighted
average common equivalent shares at December 31, 1997 as compared to
approximately 7,142,000 weighted average common equivalent shares at December
31, 1996.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS.
The Company's future operating results will be substantially dependent upon
the success of the Company's efforts to consummate the Acquisitions and develop
the Esenjay Assets and Aspect Assets, as well as the Starboard Project and other
prospects. Because the Company had divested substantially all of
67
<PAGE>
its oil and gas properties in the Mid-Continent region by the end of 1996,
revenues from the operation and sale of such properties have been substantially
reduced during 1997 and will be reduced in future years. Further, following a
sharp and unexpected drop in production from the Company's Mobile Bay wells
during the fourth quarter of 1996, the Company's share of revenues from Mobile
Bay was substantially reduced during 1997. Revenues from the operation of the
Mid-Continent and Mobile Bay properties and the sale of Mid-Continent properties
constituted the substantial majority of the Company's revenues during 1996.
As a result of the loss of revenues from the Mid-Continent region and Mobile
Bay, the Company's revenues during 1997 have been sharply reduced. While
management believes that the Acquisitions and the Starboard Project represent
the most promising prospects in the Company's history, none of those prospects
are currently producing revenue to the Company, and each will require
substantial outlays of capital to explore, develop and produce.
The Company's potential results in 1998 will be substantially effected by
the closing of the Acquisitions, which closing is subject to approval by the
Company's shareholders, as well as other provisions of the Acquisition
Agreement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a cash balance of $690,576 and a
working capital a deficit of $476,251, as compared to a cash balance of
$4,956,656 and working capital of $4,159,034 at December 31, 1996. The decrease
in cash and working capital was primarily attributable to the operating loss
incurred during 1997 and, in particular, exploration costs associated with dry
holes that were drilled during 1997.
In addition to the changes in cash, the decrease in working capital was
attributable to several other factors. Current liability increases of $186,174
in accounts payable (due to a greater volume of exploration activities), and
$153,647 in accruals and other liabilities (attributable to the current portion
of the unrealized loss on swap agreements) were largely offset by a $292,032
reduction in the revenue distribution account (primarily due to the sale of
operated properties). Current assets were effected by the previously described
reduction in cash and a reduction of $144,634 in accounts receivable
attributable to the sale of operated properties.
Cash flows used in operations totaled $1,894,402, excluding $2,258,702 of
exploration costs, which are classified under cash flows used in investing
activities. Cash flows used in investing activities totaled $2,180,392. Included
in the cash flows used in investing activities are $3,023,253 of capital
expenditures on gas and oil properties, including the exploration costs referred
to above that are included in the operating loss for the period but are excluded
from operating cash flows. The Company received $1,002,540 of proceeds from the
sale of various oil and gas properties during 1997, which partially offset
capital expenditures during 1997.
Cash flows from financing activities reflects a use of cash of $191,286
during 1997. Cash flows from financing activities consisted of proceeds from
debt issuance of $182,382 offset by repayments of long-term debt of $296,303 and
preferred stock dividends paid of $77,365.
The Company's major obligations at December 31, 1997, were substantially the
same as at December 31, 1996, and consisted principally of (i) servicing loans
from Bank of America under the Credit Agreement ($293,888 at December 31, 1997)
and other loans, (ii) a non-recourse loan relating to the development of the
Company's Starboard Project ($864,000 at December 31, 1997), (iii) payment of
Preferred Stock dividends ($77,365 of dividends were paid during 1997), (iv)
funding of the Company's exploration activities, and (v) funding of the
day-to-day operating costs. Unrealized losses on commodity transactions were
$128,936 for the period ended December 31, 1997. There were no such losses for
the same period in 1996.
The lack of success in 1997 drilling caused the Company to reduce its
exploration plans and seek a potential business consolidation. It was these
efforts which led to its negotiations with Aspect and Esenjay
68
<PAGE>
and to the execution of the Acquisition Agreement on January 19, 1998. The
Company is not currently seeking additional projects and is focused upon working
to consummate the Acquisitions.
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1.8 million pursuant to the Initial Credit Facility to fund
operational and exploration requirements before closing of the Acquisitions. The
Initial Credit Facility was implemented on January 12, 1998 and was superseded
by the New Credit Facility on February 23, 1998 (the "New Credit Facility").
Upon closing of the New Credit Facility, Aspect was repaid $500,000 in principle
(plus interest) then due under the Initial Credit Facility. The New Credit
Facility provides that the Company can borrow up to $4.8 million before closing
of the Acquisitions and, if the Acquisitions are closed, up to an aggregate of
$7.8 million. Of the initial $4.8 million, $1.8 million can be used to fund
general corporate needs and costs of exploration, and $3.0 million is to be used
to lend to Esenjay (on a secured basis) to pay exploration costs associated with
Esenjay's working interests to be conveyed to the Company upon closing of the
Acquisitions, which costs may be incurred after the Effective Date of the
Acquisitions, but before the date of closing. If the Acquisitions are closed, an
additional $3.0 million is available to fund costs of redeeming the Company's
currently outstanding Preferred Stock (a condition of closing the Acquisitions)
and exploration costs.
The New Credit Facility bears interest at the rate of a national prime rate
plus 4% per annum, provides for cash payments to the lender equal to an
overriding royalty of 0.6% of the Company's interest in wells drilled by the
Company while the New Credit Facility is outstanding, and the lender has the
right to gather, process, and transport and market, at competitive market rates,
natural gas produced from a majority of the projects the Company intends to
acquire pursuant to the Acquisitions. The New Credit Facility is secured by
mortgages on most of the Company's undeveloped exploration projects. If the
Acquisitions are closed, the assets acquired will be subject to such mortgages.
The New Credit Facility is repayable in twelve monthly payments commencing
August 31, 1998, or sooner if the borrower sells interests in the collateral or
closes any underwritten public offering of securities.
The Company has used, and expects to continue to use, its cash balances and
credit facilities to fund negative cash flows from operations. The Company
expects that it will have depleted its current cash reserves and fully used its
credit facilities by the third quarter of 1998. As such it is imperative that
the Company close the Acquisitions or find other sources of capital or merger
partners, or it will be unable to fund its projects and operations other then by
the sale of substantial working interests in Company projects, including the
Starboard Project. The Company believes that such alternatives are viable and
achievable, although no assurances can presently be made. However, a sale of the
Starboard Project interests, without closing the Acquisition, would leave the
Company without cash flow and minimal exploration project inventory. The Company
is presently in non-compliance with the terms of its loan from Bank of America,
but has secured a waiver of various covenants under the loan through June 30,
1998. The Company anticipates that it will require additional waivers of
covenants under the Bank of America loan until such time as the Company begins
to receive revenues, if ever, from its current exploration projects. The Company
has no assurance said waiver will be granted.
If the Acquisitions are closed, the Company will have what it considers an
exceptional inventory of technology enhanced, gas oriented exploration projects,
many of which are ready to drill. Until such time as the Company develops
substantial revenues from producing properties, it will require external sources
of exploration capital. It believes it will have a drillable project inventory
such that it could effectively deploy over $25.0 million of exploratory costs in
1998 on the net interests acquired by it pursuant to the Acquisitions. Sources
include the New Credit Facility, industry participants via the sale of promoted
interests, other credit facilities including its banks, which the Company
believes would be available if it can discover meaningful natural gas and/or oil
reserves net to its account, and additional equity capital. In that the Company
will operate most of the projects acquired, it could also defer a portion of the
capital costs to 1999 if adequate resources are not available; however,
management believes that such resources will be available to it in 1998 under
reasonable terms.
69
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
current directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
David W. Berry...................... 48 Chairman of the Board of Directors and President
David B. Christofferson............. 49 Executive Vice President, Secretary, General Counsel and Director
Jeffrey R. Orgill................... 52 Director
Allen H. Sweeney.................... 50 Director
Michael A. Barnes................... 55 Vice President of Exploration and Production
</TABLE>
DAVID W. BERRY has served as President of the Company since the
incorporation of its predecessor in August 1988, and has served as Chairman of
the Board of Directors since 1991. In 1978, he formed Berry Petroleum
Corporation, which was a regional natural gas and oil exploration company. In
1976 he co-founded Vulcan Energy Corporation, a Tulsa, Oklahoma, based
exploration and production company. Mr. Berry has served as the State Finance
Chairman of the Oklahoma State Republican Party, as a Trustee for the Oklahoma
Museum of Art and on the United States Senatorial Trust Committee. Mr. Berry is
a member of the Texas Independent Producers and Royalty Owners Association.
DAVID B. CHRISTOFFERSON has served as General Counsel, Secretary and a
director of the Company since 1989, and as Executive Vice President since 1993.
Mr. Christofferson has been active in the natural gas and oil industry for over
25 years, including the responsibility for over $100 million in natural gas and
oil loans when he managed the energy department of Utica National Bank. He
served as Executive Vice President of two independent natural gas and oil
companies that raised over $40 million in non-industry capital. Since 1981, and
before joining the Company, he served as a financial consultant and corporate
counsel to several Oklahoma based natural gas producers. He also briefly served
as General Counsel to a natural gas marketing company. Mr. Christofferson is a
member of the Texas Independent Producers and Royalty Owners Association. He
received a BBA in finance and a Juris Doctor from the University of Oklahoma. He
also received a Masters of Divinity from Phillips University. He is admitted to
practice law in Oklahoma.
JEFFREY R. ORGILL has served as Vice Chairman of the Board of Directors
since 1991. From October 1988 to May 1996, he served as the Company's Vice
President of Exploration and Production. Mr. Orgill was a consultant to the
Company from May 1, 1996 through March 31, 1998. He received a Bachelor of
Science degree in Geology and a Master of Science degree in Geology from Brigham
Young University.
ALLEN H. SWEENEY has served as a director of the Company since September
1993. From 1991 to 1994, Mr. Sweeney also served as Chief Accountant and as a
consultant to the Company. Since 1990, Mr. Sweeney has served as President and a
director of AHS & Associates, Inc., a gas and oil consulting firm, as President
and a director of Columbia Production Company, an independent gas and oil
company, and as Vice President and a director of Mid-America Waste Management,
Inc. He also is Chairman of the Board of Tengasco, Inc., a publicly held oil and
gas company. Mr. Sweeney received a BS in accounting from Oklahoma State
University and an MBA from Oklahoma City University.
MICHAEL A. BARNES has served as Vice President of Exploration and Production
since May 1996. From March 1991 until his employment with the Company, Mr.
Barnes served as Exploration Manager--Gulf Coast for Great Western Resources,
Inc. He has 30 years experience in the gas and oil industry with emphasis in the
Gulf Coast region. His experience includes seven years as a geologist with
Texaco, Inc. and ten years with Sandefer Oil & Gas, Inc., where he served as
Vice President of Exploration and Vice President of Exploitation. Mr. Barnes
received a BS in Geology from the University of Texas.
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<PAGE>
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended December 31, 1997, the Board of Directors held
five meetings. Each of the current directors who then was in office attended at
least 75% of the meetings of the Board of Directors and all committees thereof
on which such director served.
The Board of Directors has designated an Audit Committee and a Compensation
Committee. The Audit Committee meets with the Company's independent auditors at
least twice annually to review financial results, internal financial controls
and procedures, audit plans and recommendations. It also recommends the
selection, retention or termination of independent public accountants, approves
services to be provided by the independent public accountants before such
services are provided, and evaluates the possible effect such services will have
on their independence. The Audit Committee is newly created, and held no
meetings during 1997. The Compensation Committee recommends to the Board of
Directors the compensation of executive officers and Directors and the adoption
of stock grant and stock option plans. The Compensation Committee held three
meetings during fiscal year 1997.
DIRECTOR COMPENSATION
During the fiscal year ended December 31, 1997, directors who were not
officers of the Company were paid $1,000 for each Board of Directors' meeting
attended, and received an automatic grant of 1,500 options under the Employee
Option Plan--1997 (the "1997 Plan"). Each option grants the holder the right to
purchase one share of Common Stock at an exercise price equal to the fair market
value of the Common Stock on the date of grant. Options granted under the 1997
Plan vest annually. See "--Option Grants."
EXECUTIVE OFFICERS
Mr. Berry and Mr. Christofferson are employed pursuant to employment
agreements that will expire upon the closing of the Acquisitions. See
"--Employment Agreements." The Company's remaining executive officers serve at
the pleasure of the Board of Directors and are subject to annual appointment by
the Board at its first meeting following the annual meeting of shareholders.
SECURITY OWNERSHIP
The following table sets forth certain information, as of April 1, 1998,
with respect to the Common Stock owned by (i) each person known by management to
own beneficially more than 5% of the Company's outstanding Common Stock; (ii)
each of the Company's directors, nominees for directors and executive officers;
and (iii) all directors and executive officers of the Company as a group. Unless
otherwise noted, the persons named below have sole voting and investment power
with respect to such shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING
NAME OF BENEFICIAL OWNER SHARES(1) SHARES(2)(3)
- --------------------------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
David W. Berry(4)(5)................................................................... 142,155 8.6%
Alex Cranberg(6)....................................................................... 30,650 *
Jeffrey R. Orgill(4)(7)................................................................ 98,750 6.0%
David B. Christofferson(4)(8).......................................................... 68,000 4.1%
Allen H. Sweeney(9).................................................................... 2,000 *
Michael A. Barnes(10).................................................................. 1,390 *
Michael E. Johnson(11)................................................................. 12,500 *
Charles J. Smith(11)................................................................... 12,500 *
William D. Dodge III................................................................... --
Directors and executive officers as a group (5 persons)(12)............................ 324,795 19.6%
</TABLE>
- ------------------------
* Less than 1%.
71
<PAGE>
(1) Gives effect to the Reverse Split. Includes all shares with respect to
which each person, executive officer or director who directly, through any
contract, arrangement, understanding, relationship or otherwise, has or
shares the power to vote or to direct voting of such shares or to dispose
or to direct the disposition of such shares. Includes shares that may be
purchased under stock options exercisable within 60 days.
(2) Based on 1,655,986 shares of Common Stock outstanding at April 1, 1998,
after giving effect to the Reverse Split, plus, for each beneficial owner,
those number of shares underlying exercisable options held by each
executive officer or director.
(3) Percent of class for any shareholder listed is calculated without regard to
shares of Common Stock issuable to others upon exercise of outstanding
stock options. Any shares a shareholder is deemed to own by having the
right to acquire by exercise of an option or warrant are considered to be
outstanding solely for the purpose of calculating that shareholder's
ownership percentage.
(4) Address c/o Frontier Natural Gas Corporation, One Allen Center, Suite 2950,
Houston, Texas 77002.
(5) Includes options to purchase 32,000 shares of Common Stock that are
currently exercisable.
(6) Includes 18,750 shares of Common Stock issuable upon exercise of currently
exercisable warrants held by Aspect, as to which Mr. Cranberg disclaims
beneficial ownership.
(7) Includes options to purchase 4,000 shares of Common Stock that are
currently exercisable.
(8) Includes options to purchase 58,667 shares of Common Stock that are
currently exercisable.
(9) Includes options to purchase 2,000 shares of Common Stock that are
currently exercisable. Mr. Sweeney will cease to be a director of the
Company upon consummation of the Acquisitions.
(10) Includes options to purchase 1,390 shares of Common Stock that are
currently exercisable. Mr. Barnes will cease to be an officer of the
Company upon consummation of the Acquisitions.
(11) Includes 12,500 shares of Common Stock issuable upon exercise of currently
exercisable warrants held by Esenjay, as to which Messrs. Johnson and Smith
disclaim beneficial ownership.
(12) Includes 98,056 shares issuable pursuant to various options held by
executive officers and directors that are currently exercisable.
72
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses, paid by
the Company during each of the three fiscal years ended December 31, 1995, 1996
and 1997 to the Chief Executive Officer and to its other executive officers
(other than the Chief Executive Officer) of the Company and its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
--------------------------
AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1) COMPENSATION
- -------------------------------------------------------- --------- ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
David W. Berry.......................................... 1997 $ 134,400 -- 32,000(2) $ 44,965(3)
Chairman of the Board, 1996 124,000 -- 20,000(2) 20,145(3)
Chief Executive Officer 1995 120,000 -- -- 18,367(3)
and President
David B. Christofferson................................. 1997 $ 112,000 -- 58,667(2) $ 47,888(4)
Director, Executive Vice 1996 103,000 -- 16,667(2) 22,469(4)
President, Chief Financial 1995 85,000 5,000 -- 20,080(4)
Officer and Secretary
S. Gordon Reese, Jr.(5)................................. 1997 $ 100,000 -- -- $ 6,553
Senior Vice President 1996 98,900 -- 97,500 --
1995 70,000 35,000 -- --
Michael A. Barnes(6).................................... 1997 $ 100,000 -- 4,167 --
Vice President of Exploration 1996 61,750 -- 4,167 --
and Production 1995 -- -- -- --
</TABLE>
- ------------------------
(1) Represents the number of shares issuable pursuant to vested and non-vested
stock options after giving effect to the Reverse Split.
(2) In 1997 all stock options previously granted to Mr. Berry and Mr.
Christofferson were canceled and new stock options were granted to them
pursuant to the Employee Option Plan--1997 (the "1997 Plan"). Amounts stated
for 1997 include regrants of such canceled options. See "--Option
Repricings" and "--Employment Agreements."
(3) In 1997, the Company settled its deferred compensation liability to Mr.
Berry for a payment of $80,537. Of this amount, a total of $56,063 had been
reported as earned compensation in the years 1993-96, and the balance of
$14,474 is reported as earned in 1997.
(4) In 1997, the Company settled its deferred compensation liability to Mr.
Christofferson for a payment of $95,170. Of this amount, a total of $72,694
had been reported as earned compensation in the years 1993-96, and the
balance of $22,476 is reported as earned in 1997. See "--Deferred
Compensation."
(5) Mr. Reese has resigned as an officer of the Company.
(6) Mr. Barnes will cease to be an officer of the Company upon consummation of
the Acquisitions.
73
<PAGE>
OPTION GRANTS
The following table sets forth certain information relating to option grants
made in 1997 to the individuals named in the Summary Compensation Table above.
See "--Executive Compensation."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------
%
OF
TOTAL
OPTIONS POTENTIAL REALIZABLE
NUMBER GRANTED VALUE AT ASSUMED
OF TO ANNUAL RATES OF
SECURITIES EMPLOYEES STOCK PRICE
OF IN EXERCISE APPRECIATION FOR
UNDERLYING FISCAL PRICE OPTION TERM(3) MARKET PRICE
OPTIONS 1997 PER EXPIRATION -------------------- ON GRANT
NAME GRANTED YEAR(1) SHARE(2) DATE 5% 10% DATE
- ------------------------------------------ ------ --- ------ ----- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Berry............................ 32,000(4) 30% $3.78 11/07 $ 136,000 $ 316,000 $ 95,040(8)
David B. Christofferson................... 58,667(4) 54% $3.78 11/07 $ 249,920 $ 580,820 $ 174,240(8)
S. Gordon Reese, Jr.(5)................... -- -- -- -- -- -- --
Michael A. Barnes(6)...................... 4,167 (7) 4% $7.68 4/07 $ 1,500 $ 25,000 $ 17,250
</TABLE>
- ------------------------
(1) Based on options to purchase a total of 107,667 shares of Common Stock
(after giving effect to the Reverse Split) granted during 1997, of which
7,500 have expired.
(2) After giving effect to the Reverse Split.
(3) Potential values stated are the result of using the Commission's method of
calculating 5% and 10% appreciation in value from the date of grant to the
end of the option term. Such assumed rates of appreciation and potential
realizable values are not necessarily indicative of the appreciation, if
any, that may be realized in future periods.
(4) Consists of options issued under the 1997 Plan, all of which are currently
exercisable. Such options were issued in 1997 in replacement of certain
options and stock appreciation rights issued in previous years. See
"--Option Repricings."
(5) Mr. Reese has resigned as an executive officer of the Company. Mr. Barnes
will cease to be an officer of the Company upon consummation of the
Acquisitions.
(6) Mr. Barnes will cease to be an officer of the Company upon consummation of
the Acquisitions.
(7) All options were granted under the 1997 Plan. One-third of the options are
currently exercisable and the remaining two-thirds become exercisable over
1998 and 1999.
(8) See "--Option Repricings."
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction to satisfy the Company's need for additional
capital resources. In connection with pursuing such a transaction, Mr. Berry and
Mr. Christofferson entered into Incentive Agreements and Contract Settlement
Agreements with the Company pursuant to which each of Mr. Berry and Mr.
Christofferson are entitled to receive certain Incentive Payments and Contract
Settlement Payments upon the consummation of such a transaction. Their existing
employment agreements will terminate upon the consummation of a significant
corporate transaction.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors, which was comprised of Messrs.
Sweeney and Elliott, each of whom was an outside director, recognized that the
expiration of those options would result in a disincentive for Mr. Berry and Mr.
Christofferson to help the Company pursue a significant corporate transaction.
Therefore, the Compensation Committee determined that Mr. Berry's and Mr.
Christofferson's existing stock options should be canceled and replaced with new
stock options that would terminate on the date their old options would have
expired if their employment with the Company was not terminated. As an added
incentive, the Compensation Committee determined to reprice Mr. Berry's and Mr.
Christofferson's options so they could more readily benefit from any upturn in
the Company's Common Stock trading price upon the consummation of a significant
corporate transaction.
74
<PAGE>
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option reprice date, and
multiplied such average trading price by 0.65. The Compensation Committee
believed that the discount to the average trading price was appropriate because
the shares of Common Stock issuable upon exercise of the repriced options would
not be freely tradeable and the discount was appropriate to reflect the actual
fair market value of the illiquid shares that would be received upon the
exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
OF LENGTH OF
UNDERLYING ORIGINAL OPTION
OPTIONS/ MARKET PRICE OF EXERCISE PRICE TERM REMAINING AT
SARS STOCK AT TIME OF AT TIME OF NEW DATE OF REPRICING
REPRICED OR REPRICING OR REPRICING OR EXERCISE OR AMENDMENT
NAME DATE AMENDED(1) AMENDMENT(1) AMENDMENT(1) PRICE(1) (MONTHS)
- ------------------------------- --------- ----------- ----------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry................. 12/3/97 20,000(2) $ 5.82 $ 9.72 $ 3.78 102
President and Chief 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78 69
Executive Officer
David B. Christofferson........ 12/3/97 30,000(4) $ 5.82 $ 0.08 $ 3.78 62
Executive Vice President, 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78 69
General Counsel and 12/3/97 16,667(2) $ 5.82 $ 8.82 $ 3.78 102
Secretary
</TABLE>
- ------------------------
(1) After giving effect to the Reverse Split.
(2) Consists of options to purchase shares of Common Stock pursuant to the 1996
Plan.
(3) Consists of units, each of which included an option to purchase one share of
Common Stock and a stock appreciation right ("SAR") equal to two times the
difference between the exercise price of the option and the market value of
the SAR at the date of exercise, so that one unit had the value of three
options, all issued pursuant to the 1993 MISP.
(4) Consists of options to purchase 30,000 shares of Common Stock (after giving
effect to the Reverse Split) pursuant to the Company's 1993 Incentive Stock
Option Plan.
OPTION EXERCISE AND YEAR-END VALUES
The following table sets forth certain information as of December 31, 1997
with respect to the unexercised options to purchase Common Stock to the
individuals named in the Summary Compensation Table above. See "--Executive
Compensation." None of such individuals exercised any stock options during 1997.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
David W. Berry............................................ 32,000 -- $ 28,992 --
David B. Christofferson................................... 58,667 -- $ 53,192 --
S. Gordon Reese, Jr....................................... -- -- -- --
Michael A. Barnes......................................... 1,389 2,778 -- --
</TABLE>
- ------------------------
(1) Based on the last sale price of the Common Stock on the Nasdaq Small-Cap
Market on December 31, 1997 of $0.78.
75
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Berry and Mr. Christofferson (each an "Employee") each have entered into
an Incentive Agreement and a Contract Settlement Agreement, and their employment
agreements with the Company will be terminated upon the closing of the
Acquisitions. Pursuant to the Incentive Agreements and Contract Settlement
Agreements, the Company agreed that if the Company closes a significant
corporate transaction, and the Employee does not resign as an executive officer
before that time, the Company will pay an Incentive Payment of $134,000 to Mr.
Berry and $112,000 to Mr. Christofferson, as well as a Contract Settlement
Payment of $134,000 to Mr. Berry and $112,000 to Mr. Christofferson, at which
time Mr. Berry and Mr. Christofferson will be released from all further
obligations to the Company other than contractual confidentiality obligations.
Each of the Incentive Payments and the Contract Settlement Payments are in the
form of promissory notes bearing interest at the rate of 10% per year payable by
the Company to the Employees, with the principal amount being paid at a minimum
of $5,000 per month, beginning the first day of the third month after the
closing of the significant corporate transaction, and all principal and accrued
interest being due and payable upon the earlier of September 30, 1998, or the
completion of a public sale of any equity or debt securities of the Company,
whichever is earlier. Each of the employees, at their discretion, may defer
payment of up to 50% of the principal amount, due until January 15, 1999. The
Contract Settlement Payments are intended to satisfy the Employees existing
employment contracts. Incentive Payments are intended to compensate the
Employees for their services in soliciting, negotiating and closing a
significant corporate transaction and not in satisfaction of any prior
obligations to the Company. The Incentive Payments are in addition to any other
obligations or payments due to the Employees, including the settlement of their
previously existing employment contracts. In addition, as an inducement to the
Employees to continue to solicit and close a change of control transaction, and
regardless of whether such a transaction occurs, all of the stock options
previously granted to the employees by the Company were canceled, and the
Company issued to each of the employees new stock options pursuant to the
Employee Option Plan. See "--Option Grants" and "--Option Repricings."
The transactions contemplated by the Acquisition Agreement will constitute a
significant corporate transaction pursuant to which the Incentive Payments and
Contract Settlement Payments will be payable to Mr. Berry and Mr.
Christofferson. Upon the closing of the Acquisitions, Mr. Berry and Mr.
Christofferson will have no further contractual obligations to the Company other
than confidentiality obligations and any contractual arrangements they may
negotiate with the Company in the future.
DEFERRED COMPENSATION
Pursuant to employment agreements with Messrs. Berry, Orgill and
Christofferson, deferred compensation accrued annually payable at the rate of
$9,000 per year for each year the executive was employed by the Company. The
payment of such compensation is deferred until retirement at which time it is
payable for a period of 15 years. In lieu of receiving such deferred
compensation upon retirement, in 1997 the Company paid Mr. Berry $80,537 and Mr.
Christofferson $95,170, which amounts were based upon a present value
calculation of the deferred compensation accrued as of August 30, 1997.
OPTION PLANS
MANAGEMENT INCENTIVE STOCK PLAN--1993. The MISP-1993 authorized the
issuance of up to 40,000 units (after giving effect to the Reverse Split). Each
unit consists of (i) an option to purchase 1/6 share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of exercise of
the option exceeds the exercise price. Currently, all units have expired or have
been canceled by the Board of Directors other than 8,000 units currently
outstanding, 3,000 of which expire in May 1998.
STOCK INCENTIVE OPTION PLAN--1996. The 1996 Plan authorized the issuance of
up to 58,334 options (after giving effect to the Reverse Split) to purchase 1/6
share of Common Stock. Currently, all options have
76
<PAGE>
expired or have been canceled by the Board of Directors other than 23,667
options currently outstanding, of which 3,792 expire in May 1998.
EMPLOYEE OPTION PLAN--1997. The 1997 Plan authorizes the issuance of up to
115,892 options (after giving effect to the Reverse Split) to purchase 1/6 share
of Common Stock. Options to purchase 25,042 shares are currently outstanding, of
which 1,000 expire in May 1998.
CERTAIN TRANSACTIONS
Effective May 1, 1996, Jeffrey Orgill and the Company agreed to the
termination of Mr. Orgill's employment agreement and Mr. Orgill resigned as Vice
President of Exploration and Production as of May 1, 1996 that expired in March,
1998. Mr. Orgill entered into a Consulting Agreement with the Company effective
May 1, 1996. Mr. Orgill was paid $10,000 per month under the terms of the
agreement through March 1998. Pursuant to the Consulting Agreement, the Company
paid $120,000 to Mr. Orgill during 1997 for consulting services.
The Company made advances to officers and affiliates of the Company during
1996 and 1997 of $51,143 and $48,380, respectively, and received repayments of
$18,741 and $99,216, respectively. The December 31, 1996 and 1997 receivables
include approximately $47,787 and $47,787, respectively, from an affiliated
partnership for which the Company serves as the managing general partner.
During 1996, as a part of the Company's relocation to Houston, Texas, the
Company purchased the homes of David W. Berry and David B. Christofferson, both
officers of the Company, for $191,395 and $178,000, respectively. These amounts
in each case were ascertained by averaging two independent MAI appraisals to
determine fair market value. The Company subsequently sold the homes at a sales
contract price of $176,200 and $178,000, respectively, pursuant to which sales
contracts the Company received net sales proceeds after commissions and other
selling expenses of $158,847 and $165,626, respectively.
Alex M. Cranberg, who is a nominee for election as a director, also is
President and a principal of Aspect. Mr. Cranberg will remain in as President of
Aspect and will retain his equity interest in Aspect after consummation of the
Acquisitions. Aspect is active in the exploration of oil and gas properties, and
will be a competitor of the Company after consummation of the Acquisitions.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities, to file reports of ownership on Form 3 and
changes in ownership on Form 4 or 5 with the Commission. Such officers,
directors and 10% shareholders also are required by Commission rules to furnish
the Company with copies of all Section 16(a) reports they file. Based solely on
its review of the copies of such forms received by it, or written
representations from certain reporting persons that they were not required to
file a Form 5, the Company believes that, during the fiscal year ended December
31, 1997, its officers, directors and 10% shareholders complied with all Section
16(a) filing requirements applicable to such individuals.
77
<PAGE>
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation and By-Laws provide for three
classes of directors serving staggered three-year terms, with each class to be
as nearly equal in number as possible. At the Special Meeting, three directors
are to be elected to hold office until the annual meeting of shareholders in
2000, three directors are to be elected to hold office until the annual meeting
of shareholders in 1999, and one director is to be elected to hold office until
the annual meeting of shareholders in 1998.
The persons named in the accompanying proxy have been designated by the
Board of Directors, and unless authority is withheld, they intend to vote for
the election of the nominees named below to the Board of Directors. If any of
the nominees become unavailable to serve, the shares represented by proxies will
be voted for the election of a substitute nominee selected by the persons named
in the proxy, or the Board may be reduced accordingly; however, the Board of
Directors is not aware of any circumstances likely to render any nominee
unavailable for election.
The nominees set forth below will be elected as directors only if they
receive the requisite votes for election at the Special Meeting, and only if the
Acquisition Agreement and the Reverse Split are approved. If the Acquisition
Agreement and the Reverse Split are not approved, the directors set forth under
"Management" will remain in office until the next annual shareholders meeting.
See "Management."
Certain information concerning the nominees is set forth below. For
biographical information and information with respect to stock ownership of
nominees who currently serve as directors, see "Management--Directors and
Executive Officers" and "--Security Ownership."
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
APRIL 1, 1998(1)
--------------------------
PERCENT
NAME POSITION AGE SHARES(1) OF CLASS(2)
- ---------------------------------------- ---------------------------------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
CLASS I DIRECTOR
WHOSE TERM WILL EXPIRE IN 2000
Alex M. Cranberg(3)(6).................. Vice Chairman of the Board 42 11,234 *
Michael E. Johnson(5)................... Director and President and 49 12,500(5) *
Chief Executive Officer
Jack P. Randall(4)(6)................... Director --
CLASS II DIRECTOR
WHOSE TERM WILL EXPIRE IN 1999
David W. Berry(4)....................... Chairman of the Board 48 142,155(7) 8.6%
Alex B. Campbell........................ Director 40 -- *
Charles J. Smith........................ Director 71 12,500(5) *
CLASS III DIRECTOR
WHOSE TERM WILL EXPIRE IN 1998
William D. Dodge III(4)(6).............. Director 50 --
</TABLE>
- ------------------------
* Less than one percent.
(1) After giving effect to the Reverse Split. Includes all shares with respect
to which each person directly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares the power to vote or
to direct voting of such shares or to dispose or to direct the disposition
of such shares.
(2) Based on 1,655,985 shares of Common Stock outstanding (after giving effect
to the Reverse Split) at April 1, 1998.
(3) Includes 18,750 shares of Common Stock issuable upon exercise of currently
exercisable warrants held by Aspect, as to which Mr. Cranberg disclaims
beneficial ownership.
(4) Member of the Audit Committee.
78
<PAGE>
(5) Includes 12,500 shares of Common Stock issuable upon exercise of currently
exercisable warrants held by Esenjay, as to which Messrs. Johnson and Smith
disclaim beneficial ownership.
(6) Member of the Compensation Committee.
(7) Includes options to purchase 38,400 shares of Common Stock that are
currently exercisable.
ALEX M. CRANBERG has been President of Aspect since its inception in 1993.
He joined Houston Oil and Minerals Corp. in 1977 where he served in various
engineering and financial roles. He has been manager of the oil and gas
portfolio of General Atlantic Partners, a private investment firm for over five
years. He is on the Board of Directors of Brigham Exploration, Inc., a public
company, and Westport Oil and Gas Inc., a private exploration and production
company active in the Rocky Mountain and Gulf Coast regions. He received a BS in
petroleum engineering from the University of Texas and an MBA from Stanford
University.
MICHAEL E. JOHNSON has been President of Esenjay Petroleum Corporation since
1978. He was an operations engineer for Atlantic Richfield Co. from 1971 to 1976
and worked for Tana Oil and Gas before founding Esenjay, where he has managed
all exploration activities, coordinated outside technical support and raised
capital from industry partners. He received a BS in mechanical engineering from
the University of Southwestern Louisiana.
JACK P. RANDALL founded Randall & Dewey, Inc. in 1989 and has served as its
President since that time. Randall & Dewey is a Houston, Texas, based
transaction advisory firm focusing on oil and gas mergers, acquisitions,
divestments, trades and alliances. Before founding Randall & Dewey, he was with
Amoco Production Company from 1975 to 1989, where his service included acting as
Manager of Acquisitions and Investments. Mr. Randall is a member of the Board of
Directors of Crosstimbers Oil Company, the chairman of the Petroleum Engineering
Visiting Committee at the University of Texas at Austin, and a member of the
Implementation Advisory Committee for the Oil Recovery Center of Excellence at
the University of Texas at Austin. He also is a member of the Society for
Petroleum Engineers, the American Petroleum Institute and the Independent
Petroleum Association of America. He received BS and MS degrees in engineering
from the University of Texas.
ALEX B. CAMPBELL has been vice president of Aspect since August 1996 and is
responsible for land and corporate development and legal issues. He served as
landman for Grynberg Petroleum and TXO Production Corp. from 1980 to 1984,
focusing on the Rocky Mountain Region, then as division landman for Lario Oil &
Gas Company from 1984 to 1996, where he was responsible for administration,
prospect marketing, contract lease negotiation, exploration permitting, surface
owner negotiations, property acquisition negotiation and due diligence. He has a
BA in business/pre-law from Colorado State University, and an MBA from Colorado
State University.
CHARLES J. SMITH has served as Chairman and Chief Executive Officer of
Esenjay Petroleum Corporation since its formation in 1978. Mr. Smith acts as
Esenjay's senior land and administrative officer. He was a practicing attorney
specializing in oil and gas law from 1963 to 1987. Before 1963, he was a
petroleum landman for Humble Oil and Refining Company. Mr. Smith received a BBA
in industrial management from the University of Texas and was admitted to
practice law in Texas in 1959 after attending South Texas School of Law and the
completion of off-campus studies.
WILLIAM D. DODGE, III has been Regional President of Pacific Southwest Bank,
Corpus Christi, Texas since 1995. He has been active in banking since 1977,
including serving as President of The Bank of Robstown, Texas from 1982 until
1995. He also serves in a number of civic roles, including as Chairman of the
Port of Corpus Christi Authority, and serving on the Board of Directors of
Columbia Northwest Hospital. Mr. Dodge is a member of the Editorial Review Board
SAM Advanced Management Journal at the Texas A&M University-Corpus Christi
College of Business. He received a BA degree from the University of Texas at
Austin and attended the Southwestern Graduate School of Banking, Southern
Methodist University.
79
<PAGE>
RECOMMENDATION AND VOTE
The nominees for election as directors who receive the greatest number of
votes shall be elected as directors. If the Acquisition Agreement and the
Reverse Split are approved, the directors elected at the Special Meeting will
assume office even if the Reincorporation is not approved.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE.
80
<PAGE>
THE REVERSE SPLIT
GENERAL
Pursuant to the Reverse Split, each presently outstanding share of Common
Stock ("Old Stock") will be converted automatically and without further action
by the shareholders upon effectiveness of the Reverse Split into 1/6th of a
share of new common stock, par value $.01 per share, of the Company as so
recapitalized ("New Stock"). Any fractional interests resulting from the Reverse
Split will be rounded up to the nearest whole share of New Stock.
REASONS FOR THE REVERSE SPLIT
NASDAQ SMALL-CAP MARKET LISTING REQUIREMENTS. The Board of Directors
believes that the reduction in the number of issued and outstanding shares of
Common Stock may increase the market price for the Common Stock. The anticipated
market price increase is important because the bid price for the Common Stock
currently does not meet the minimum requirements for continued listing on the
Nasdaq Small-Cap Market. Continued listing requires, among other things, a
minimum bid price for a listed security of at least $1.00 per share.
The Company has received notice from Nasdaq that it is not in compliance
with the Nasdaq Small-Cap Market continued listing requirements, and the Company
has until July 1, 1998 to come into compliance by having a closing bid price of
at least $1.00 for 10 consecutive trading days. The Company could come into
compliance if the bid price for the Common Stock should increase as a result of
the Acquisitions, an increase in the prices of oil and gas generally, or for
other reasons. Even if such an increase occurs, however, under Nasdaq rules, the
Common Stock could be removed from listing if Nasdaq determines that the Company
is unlikely to continue to meet the continued listing criteria. Any increase in
the trading price for the Common Stock resulting from the Reverse Split will be
a factor Nasdaq will consider in determining whether the Company will be able to
meet the continued listing requirements in the future.
EFFECT ON LIQUIDITY. Removal from listing would have a material adverse
effect on the liquidity of the Common Stock and upon the price that shareholders
would likely receive in any sales of the Company's Common Stock. If the Common
Stock was removed from trading on the Nasdaq Small-Cap Market, the Common Stock
still could be eligible for trading on the Nasdaq Bulletin Board, the "Pink
Sheets," or other over-the-counter markets, however, such markets would not
provide the liquidity available through the Nasdaq Small-Cap Market. In
addition, if the Common Stock were removed from trading on the Nasdaq Small-Cap
Market, and the trading price of the Common Stock remained below $5.00 per
share, trading in the Company's Common Stock would be subject to the
requirements of certain rules under the Exchange Act that require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a "penny stock" (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). The
additional burdens imposed upon broker-dealers by these requirements could
discourage broker-dealers from effecting transactions in the Common Stock, which
could severely limit the market liquidity of the Common Stock and the ability of
investors to trade the Common Stock.
The Board of Directors also believes that the proposed Reverse Split will
result in a broader market for the Common Stock than that which currently
exists. A variety of brokerage house policies and practices tend to discourage
individual brokers within those firms from dealing with lower priced stocks,
even when such stocks are not subject to the "penny stock" rules described
above. Some of those policies and practices pertain to the payment of broker's
commissions and to time consuming procedures that function to make the handling
of lower priced stocks economically unattractive to brokers. In addition, the
structure of trading commissions also tends to have an adverse impact upon
holders of lower priced stocks because the brokerage commission on the sale of
lower priced stocks generally represents a higher percentage of the sales price
than the commission on a relatively higher priced issue. The Reverse Split may
result in a
81
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price level for the Common Stock that will reduce, to some extent, the effect of
these policies and practices. The expected increased trading price also may
encourage interest and trading in the Common Stock, and possibly promote greater
liquidity for the Company's shareholders.
ISSUANCE OF COMMON STOCK IN THE ACQUISITIONS. If the Reverse Split is not
approved, the Company will not have sufficient shares available for issuance to
consummate the Acquisitions. Therefore, approval of the Reverse Split is
required for consummation of the Acquisitions.
RISKS ASSOCIATED WITH THE REVERSE SPLIT
There can be no assurance that any of the intended benefits of the Reverse
Split will occur. Although the Company anticipates that a reduction in the
number of issued and outstanding shares of Common Stock resulting from the
Reverse Split may increase the market price for the Common Stock, there can be
no assurance that the six-for-one Reverse Split will result in a trading price
increase equal to six times the pre-Reverse Split trading price. The failure of
the market price of the Common Stock after the Reverse Split to increase by the
same percentage by which the number of shares of Common Stock was reduced would
have an adverse effect on the value of the shares of Common Stock owned by the
Company's current shareholders. There can be no assurance that the Reverse Split
will achieve the goal of increasing interest in trading the Common Stock or
promoting greater liquidity in the Company's Common Stock, or will permit the
Company to maintain minimum trading price requirements for continued listing on
the Nasdaq Small-Cap Market. See "Risk Factors--Risks of Approving the Reverse
Split."
EFFECT ON OUTSTANDING CONVERTIBLE SECURITIES
The Company has previously issued, and has outstanding, various options and
warrants to purchase 9,580, 922 shares of its Common Stock (1,596,821 shares
after giving effect to the Reverse Split). The terms of all of such options and
warrants include provisions for adjustments to the exercise price and the number
of shares issued upon exercise of such options and warrants as a result of the
Reverse Split. If the Reverse Split is approved by the shareholders at the
Special Meeting, the exercise prices will increase to six times the pre-Reverse
Split exercise prices and the number of shares subject to such options and
warrants will decrease to one sixth of the pre-Reverse Split amount.
EFFECTS OF THE REVERSE SPLIT
The Reverse Split will be formally implemented by amending the present
Article V of the Company's Certificate of Incorporation to add the following:
"Each six shares of the Company's Common Stock, par value $.01 per
share, issued as of the date and time immediately preceding
[insert date which amended certificate is filed], the effective
date of a reverse stock split (the "Split Effective Date") shall
be automatically changed and reclassified, as of the Split
Effective Date and without further action, into one fully paid and
nonassessable share of the Company's Common Stock, par value $.01
per share; PROVIDED, HOWEVER, that any fractional interests
resulting from such change in classification shall be rounded
upward to the next whole share."
The form of such amendment is attached hereto as Appendix E.
If the Reverse Split is approved, the authorized number of shares of Common
Stock will remain at 40,000,000 and the par value of the Common Stock will
remain at $.01 per share. The Reverse Split will not affect any shareholder's
proportionate equity interest in the Company or the rights, preferences,
privileges or priorities of any shareholder other than an adjustment that may
occur due to the rounding up of fractional shares. A shareholder may hold less
than 100 shares of the Common Stock after the Reverse Split, and as a
consequence, may incur greater costs associated with trading. The Reverse Split
will not affect the Company's total stockholders' equity or any components of
stockholders' equity as reflected in
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the Company's financial statements except (i) to change the number of the issued
and outstanding shares of capital stock and (ii) for the adjustment that will
occur due to the costs incurred by the Company in connection with this Proxy
Statement and the implementation of the proposals that are approved by the
shareholders. However, because the number of shares of capital stock that the
Company is authorized to issue will not be decreased in proportion to the
six-for-one decrease in the number of issued and outstanding shares, the number
of shares that are authorized but unissued and the percentage of ownership of
the Company represented by such shares, if they are issued in the future,
effectively will be increased.
The following table illustrates the principle effects on the Company's
capital stock after giving effect to the Reverse Split.
NUMBER OF SHARES OF CAPITAL STOCK
<TABLE>
<CAPTION>
BEFORE AFTER
REVERSE REVERSE
SPLIT SPLIT
------------ ------------
<S> <C> <C>
COMMON STOCK
Authorized........................................... 40,000,000 40,000,000
Issued and Outstanding............................... 9,935,906(1) 1,655,985(1)(2)
Available for Issuance............................... 30,064,094(3) 38,334,015(2)(4)
PREFERRED STOCK
Authorized........................................... 5,000,000 5,000,000
Issued and Outstanding(5)............................ 85,961 85,961
Available for Issuance(5)............................ 4,914,039 4,914,039
</TABLE>
- ------------------------
(1) Does not include 9,580,922 shares (1,596,820 shares after giving effect to
the Reverse Split) issuable pursuant to outstanding options, warrants and
convertible securities.
(2) Does not include additional shares issuable in settlement of fractional
interests resulting from the Reverse Split.
(3) Does not include shares issuable pursuant to the Acquisitions.
(4) Does not include 10,106,700 shares issuable pursuant to the Acquisitions.
After giving effect to the Acquisitions, 28,296,480 shares of Common Stock
will remain available for issuance.
(5) The issued and outstanding Preferred Stock will be redeemed after
consummation of the Acquisitions, and as a result of such redemption,
5,000,000 shares of preferred stock will be available for issuance.
EXCHANGE OF STOCK CERTIFICATES
On the effective date of the Reverse Split, each certificate representing
shares of Old Stock will be deemed for all corporate purposes to evidence
ownership of the appropriate number of shares of New Stock. One share of New
Stock will be issued in exchange for each six presently issued and outstanding
shares of Old Stock with fractional interests rounded up to the next whole
share.
Commencing immediately after the effective date of the Reverse Split,
shareholders will be notified by Bank One Trust Company Oklahoma, N.A. as
exchange agent (the "Exchange Agent"), of the procedures necessary to complete
the certificate exchange. Shareholders should not submit their Old Stock
certificates for exchange until they have received a letter of transmittal and
instructions from the Exchange Agent. Shareholders will not receive certificates
representing New Stock unless and until the certificates representing the Old
Stock are surrendered along with a properly completed and executed letter of
transmittal in the form provided by the Exchange Agent. Shareholders with more
than one certificate representing Old Stock should submit all such Old Stock
certificates for exchange, and, such certificates will be
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<PAGE>
aggregated for purposes of the exchange and the calculation of shares issuable
with respect to fractional interests.
The Reverse Split will not affect the listing of the New Stock, which will
be traded on the Nasdaq Small-Cap Market without interruption under the symbol
"ESNJ." However, holders of Old Stock certificates will be required to deliver
Old Stock certificates representing a sufficient number of shares of New Stock
to cover any sales.
The certificate exchange with respect to Old Stock certificates will be made
concurrently with the exchange of certificates with respect to the
Reincorporation. See "The Reincorporation--Certificate Exchange."
Shareholders will not be charged any fee with respect to the exchange of
certificates.
LISTING
The Company has filed an application with Nasdaq to list the New Stock for
trading on the Nasdaq Small-Cap Market.
VOTE AND RECOMMENDATION
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Common Stock is required to approve the Reverse Split.
Since the affirmative vote of a majority of the issued and outstanding shares of
Common Stock is required to approve the Reverse Split, as opposed to a specified
percentage of the shares present to vote at the Special Meeting, the failure to
vote in person or by proxy, or an abstention from voting, will have the same
effect as a vote against the Reverse Split, and thus, against the Acquisition
Agreement because adoption of the Reverse Split is required for consummation of
the Acquisitions. However, if approved, the Reverse Split will take effect even
if the Acquisition Agreement and the Reincorporation are not approved, and even
if the nominees for director named herein are not elected.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE REVERSE SPLIT.
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THE REINCORPORATION
GENERAL
At the Special Meeting, shareholders will be asked to approve and adopt a
Plan and Agreement of Merger (a copy of which is attached hereto as Appendix F
and incorporated herein by reference), pursuant to which the Company will merge
into its wholly-owned subsidiary, Esenjay Exploration, Inc., a Delaware
corporation ("Newco"), with each outstanding share of the Company's Common Stock
being automatically converted by operation of law, without further action by the
shareholders, into one substantially identical share of Newco common stock, par
value $.01 per share (the "Reincorporation"). Upon the Reincorporation, the
former shareholders of the Company will own an identical interest (except
insofar as the rights of shareholders may differ under the corporation laws of
Oklahoma and Delaware) in Newco, which will continue to own and operate the
identical assets and business (subject to the same liabilities and obligations)
that were owned and operated by the Company before the Reincorporation.
NO CHANGES IN BUSINESS OF THE COMPANY
No change in the business or management of the Company will result from the
Reincorporation. Newco's business will be carried on in the same places and in
the same manner as the business of the Company. The certificate of incorporation
and bylaws of Newco will be as nearly as practicable identical to the
certificate of incorporation and bylaws applicable to the Company at the date of
the Special Meeting. Newco will possess all the assets and will be responsible
for all liabilities of the Company. All employee benefit plans will be continued
by Newco, and each share of Newco Common Stock outstanding or options issued
pursuant to such plans, as the case may be, will automatically be converted into
the same number of shares of Newco Common Stock or an option to purchase the
same number of shares of Newco Common Stock at the same option price per share,
upon the same terms and subject to the same conditions as set forth in such
plans. Approval of the Reincorporation also will constitute approval of the
assumption of these plans by Newco. In addition, all outstanding warrants and
options of the Company will automatically be converted into warrants or options
to purchase the same number of shares of Newco Common Stock at the same
conversion price per share, upon the same terms and subject to the same
conditions as set forth in such warrants or options.
REASONS FOR THE REINCORPORATION
For many years, Delaware has followed a policy of encouraging incorporation
in that state and, in furtherance of that policy, has long been a leader in
adopting, construing, and implementing comprehensive, flexible corporate laws
responsive to the legal and business needs of corporations organized under its
laws. The Delaware General Corporation Law (the "DGCL") is widely regarded as
the most extensive and well-defined body of corporate law in the United States.
Because of Delaware's prominence as the state of incorporation for many major
corporations, both the legislature and courts in Delaware have demonstrated an
ability and a willingness to act quickly and effectively to meet changing
business needs. Moreover, the Delaware courts have rendered a substantial number
of decisions interpreting and explaining Delaware law and public policies with
respect to corporate issues. This is especially true in the areas of director
liability and contests for corporate control and the related issues of a board's
fiduciary duties in responding to unsolicited tender offers, aggressive market
buying programs, proxy contests and other types of efforts to acquire control of
a corporation. As a result, many corporations have initially chosen Delaware for
their state of incorporation or subsequently have changed their corporate
domiciles to Delaware in a manner similar to that proposed by the Board of
Directors. Although the Oklahoma General Corporation Act (the "OGCA"), which was
enacted in 1986, is substantially similar to and based upon the DGCL, the
Oklahoma courts have issued few decisions interpreting or explaining the
Oklahoma law.
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<PAGE>
DIFFERENCES BETWEEN THE OKLAHOMA AND DELAWARE CORPORATION LAWS
The OGCA is based on the DGCL, and thus, few differences exist in the
statutes. Some of the differences between the Oklahoma and Delaware corporation
laws (as elaborated by the charter and bylaws of the Company and Newco), to the
extent they may affect the rights of shareholders, are set forth below. Although
the Company believes that all the material differences are summarized below, the
description is a summary only, and does not purport to be a complete description
of the differences between the Oklahoma and Delaware corporation laws.
DIRECTOR LIABILITY. Under both Oklahoma and Delaware law, corporations may
adopt provisions in their charter documents reducing or eliminating the
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director. Both the Company and Newco
have such a provision in their charter documents. However, the courts of
Delaware have more frequently interpreted statutory and charter provisions
regarding the liability of directors and, as a result, may offer more guidance
than the courts of Oklahoma with respect to such provisions. The Company
believes that these Delaware provisions, and the case law that has been
developed by the Delaware courts with respect thereto, may enhance its ability
to attract and retain qualified directors.
In accordance with Delaware law, the Newco certificate of incorporation does
not limit or eliminate liability based on the following types of claims: (i)
liability based on a breach of the director's duty of loyalty to Newco or its
shareholders; (ii) liability based on the payment of an improper dividend or an
improper repurchase of Newco's stock under Section 174 of the DGCL; (iii)
liability for actions or failure to act that the director knew were in violation
of law; (iv) liability arising out of intentional misconduct by the director (v)
liability arising out of any transaction pursuant to which the director received
some improper personal benefit; or (vi) liability for actions taken, or a
failure to act, by the director not in good faith.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AGENTS. Oklahoma law and
Delaware Law have substantially similar provisions and limitations regarding
indemnification by a corporation of its officers, directors, employees and other
agents. The Bylaws of Newco have implemented the applicable statutory framework.
They require that indemnity must be provided to officers and directors where
permitted by statute and provide procedural mechanisms for directors and
officers to enforce these rights. The protection afforded by these Bylaws may be
extended by the Board of Directors to employees and other agents of Newco.
CONTESTS FOR CORPORATE CONTROL. Section 203 of the DGCL and Section 1090.3
of the OGCA prohibit certain "business combinations" with an "interested
stockholder" of a Delaware corporation (an "interested shareholder" of an
Oklahoma corporation) for a period of three years following the date that such
person or entity becomes an "interested stockholder." Generally, an "interested
stockholder" is a person or entity which, together with its affiliates (i) owns
15% or more of the outstanding voting stock of a corporation or (ii) which is an
affiliate or associate of the corporation and was, at any time within the
previous three years, the owner of 15% or more of the outstanding voting stock
of the corporation.
The term "business combination" is defined broadly to include mergers with
or caused by an interested stockholder, sales or other dispositions of assets of
the corporation or a subsidiary equal to 10% or more of the value of the
corporation's consolidated assets or its outstanding stock to an interested
stockholder, transfer of stock of the corporation or a subsidiary to an
interested stockholder (except for transfers in a conversion or exchange or a
pro rata distribution that does not increase the interested stockholder's
proportionate ownership of a class or series) or any receipt by an interested
stockholder (except proportionately as a stockholder) of any loans, advances,
guarantees, pledges or other financial benefits.
The three-year moratorium imposed on business combinations by Sections 203
and 1090.3 does not apply if (i) before a person's becoming an interested
stockholder, the Board of Directors approves the
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business combination or the transaction that resulted in such person becoming an
interested stockholder, (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction, which makes him
an interested stockholder (excluding from the 85% calculation shares owned by
directors who are also officers and shares held by employee stock plans that do
not permit employees to decide confidentially whether to accept a tender offer)
or (iii) on or after the date a person becomes an interested stockholder, the
business combination is approved by the board of directors of the corporation
and by two-thirds of the voting stock not owned by the interested stockholder.
Section 203 also permits an interested stockholder to compete with a tender or
exchange offer made by an unaffiliated third party and approved, or not opposed,
by the Board of Directors, or with a management sponsored or approved purchase,
or certain other transactions.
The restrictions of Sections 203 and 1090.3 do not apply to any person who
inadvertently becomes an interested stockholder and who, as soon as practicable,
sells sufficient shares to no longer be a 15% stockholder.
REDEMPTION OF CAPITAL STOCK. Oklahoma law limits the classes or series of
stock that may be made subject to redemption, allowing redemption of any stock
that is entitled upon any distribution of the corporation's assets, whether by
dividend or by liquidation, to a preference over another class or series of
stock. Delaware law allows any class or series of stock to be made subject to
redemption, regardless of dividend or liquidation preferences.
LOST OR STOLEN STOCK CERTIFICATES. Delaware law allows a corporation to
require an indemnity bond from a shareholder before issuing to such shareholder
a new stock certificate to replace a lost, stolen, or destroyed certificate,
while providing expedited judicial proceedings through which a shareholder can
compel issuance of a new certificate to replace a lost, stolen, or destroyed
certificate should the corporation refuse to issue a replacement certificate.
Oklahoma law does not contain similar provisions.
LIMITATIONS ON VOTING TRUSTS. Oklahoma law contains certain restrictions on
the creation and operation of shareholder voting trusts and voting agreements
that are not found in Delaware law, such as restricting the terms of the trusts
and agreements to ten years, unless extended for a longer period (not to exceed
10 years) within two years before the expiration of such trusts and agreements.
Oklahoma law also requires delivery of voting trust certificates to
beneficiaries of voting trusts.
SHAREHOLDERS ACTION BY WRITTEN CONSENT. Oklahoma law contains restrictions
on the ability of shareholders of to take action by written consent. Under
Oklahoma law, a corporation with a class of voting stock listed or traded on a
national securities exchange, or registered under Section 12(g) of the Exchange
Act, which has one thousand or more shareholders of record, can take action by
written consent only with the written consent of all shareholders, unless
otherwise provided for in the certificate of incorporation. Delaware corporate
law contains no such restriction.
MERGERS WITH WHOLLY-OWNED SUBSIDIARIES. Delaware law provides that no
shareholder vote of a constituent corporation is required in certain mergers
where such constituent corporation and a direct or indirect wholly-owned
subsidiary of such constituent corporation (such subsidiary being defined as a
"holding company") are the only constituent corporations to a merger, and where
the merger and/or the constituent corporations have certain other
characteristics. Oklahoma law contains no similar provision.
Despite the belief of the Board of Directors that the Reincorporation is in
the best interest of the Company and its shareholders, shareholders should also
be aware that Delaware law has been publicly criticized on the grounds that it
does not afford minority shareholders the same substantive rights and
protections as are available in certain other states. However, there are no
material differences between Oklahoma law and Delaware law with respect to
shareholder approval of corporate transactions, shareholder approval of
amendments to charter documents, newly created directorships, removal of
directors, elimination of shareholder power to call a special shareholders'
meeting, inspection of books, records and
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shareholder lists, appraisal rights, dissolution, dividends, shareholder action
without a meeting, repurchase or redemption of shares or proxies.
REASONS FOR NAME CHANGE
The Board of Directors believes that the name change represents a useful
symbolic reflection of the Company's new direction. The change in the Company's
name to Esenjay Exploration, Inc. will identify the Company to the public by
reference to an entity that will have contributed a substantial percentage of
the Company's assets, and that will provide significant managerial guidance to
the Company following consummation of the Acquisitions.
CONSUMMATION OF THE REINCORPORATION
The Reincorporation will be consummated as promptly as practicable after
shareholder approval is obtained. The Reincorporation will become effective upon
the filing of the Plan and Agreement of Merger with the Secretaries of State of
Delaware and Oklahoma and the receipt of a certificate of merger from the
Department of State of Oklahoma.
NO DISSENTERS RIGHTS
Under Oklahoma law, the shareholders of the Company will not have the right
to dissent from the Reincorporation or receive an agreed and a judicially
appraised value of their shares.
CERTIFICATE EXCHANGE
On the effective date of the Reincorporation, each certificate representing
Common Stock will be deemed for all corporate purposes to evidence ownership of
the appropriate number of shares of Newco Common Stock. Each share of Newco
Common Stock will be issued in exchange for one issued and outstanding share of
Common Stock.
Commencing immediately after the effective date of the Reincorporation,
shareholders will be notified by the Exchange Agent of the procedures necessary
to complete the certificate exchange. Shareholders should not submit their
Common Stock certificates for exchange until they have received a letter of
transmittal and instructions from the Exchange Agent. Shareholders will not
receive certificates representing Newco Common Stock unless and until the
certificates representing the Common Stock are surrendered along with a properly
completed and executed letter of transmittal in the form provided by the
Exchange Agent. Shareholders with more than one certificate representing Common
Stock should submit all such Common Stock certificates for exchange, and, such
certificates will be aggregated for purposes of the exchange.
The Reincorporation will not affect the listing of the Newco Common Stock,
which will be traded on the Nasdaq Small-Cap Market without interruption under
the symbol "ESNJ."
The certificate exchange with respect to Common Stock certificates will be
made concurrently with the exchange of certificates with respect to the Reverse
Split. See "The Reverse Split--Certificate Exchange."
Shareholders will not be charged any fee with respect to the exchange of
certificates.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary of certain Federal income tax consequence to
Company shareholders who become holders of Newco Common stock in exchange for
Company Common Stock as a result of the Reincorporation. The statement does not
deal with all aspects of Federal taxation that may be relevant to particular
Company shareholders, such as dealers in securities and certain holders of stock
options or
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shares acquired upon exercise of stock options. In view of the individual nature
of tax consequences, shareholders are urged to consult their own tax advisors as
to the specific tax consequences to them of the Reincorporation, including the
applicability, of Federal, state, local and foreign tax laws.
The Company has not requested a ruling from the IRS with respect to the
Federal income tax consequences of the Reincorporation under the Code. The
Company will, however, receive an opinion from tax counsel, Chamberlain,
Hrdlicka, White, Williams & Martin, Houston, Texas, substantially to the effect
that: (i) the Reincorporation will constitute a tax-free reorganization under
Section 368(a) of the Code; (ii) no gain or loss will be recognized by holders
of Common Stock of the Company upon receipt of Newco Common Stock pursuant to
the Reincorporation; (iii) the aggregate tax basis of the Common Stock of the
Company received by each shareholder will be the same as the aggregate tax basis
of the Common Stock of Newco held by such shareholder at the time of the
Reincorporation, and (iv) the holding period of the Common Stock of Newco
received by each shareholder of will include the period for which such
shareholder held the Common Stock of Company surrendered in exchange therefore
provided that such Company Common Stock was held by such shareholder as a
capital asset at the time of the Reincorporation.
The Company will not recognize gain or loss for federal income lax purposes
as a result of the Reincorporation. Newco will succeed, without adjustment, to
the federal income tax attributes of the Company.
ACCOUNTING TREATMENT
For financial reporting purposes, the Reincorporation will be treated as a
reorganization of affiliated entities with all assets and liabilities of the
Company recorded on the books of Newco at the historical cost basis book
carrying values.
TRANSFERABILITY OF AND MARKET FOR SHARES
The issuance of certificates evidencing shares of Newco Common Stock is
exempt from registration under the Securities Act by virtue of the exemption
afforded by Section 3(a)(9) and, in general, such shares will be freely
transferable by the holders thereof; HOWEVER, persons who are "affiliates"
(within the meaning of the Securities Act) of Newco will continue to be subject
to limitations as to timing and manner of sale and the number of shares of Newco
common stock that may be sold, all as specified by Rule 144 under the Act.
VOTE AND RECOMMENDATION
The affirmative vote of the majority of the issued and outstanding shares of
Common Stock is required to approve the Reincorporation. Since the affirmative
vote of a majority of the issued and outstanding shares of Common Stock is
required to approve the Reincorporation, as opposed to a specified percentage of
the shares present to vote at the Special Meeting, the failure to vote in person
or by proxy, or an abstention from voting, will have the same effect as a vote
against the Reincorporation. If approved, the Reincorporation will take effect
even if the Acquisition Agreement and the Reverse Split are not approved, and
even if the nominees for director are not elected.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE REINCORPORATION.
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, $.01 par value per share
(the "Preferred Stock"). As of April 1, 1998, 9,935,906 shares of Common Stock
were issued and outstanding (1,655,985 after giving effect to the Reverse
Split).
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of shareholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of preferred stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of any class of preferred stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock will be subordinate to the rights of the holders of
shares of any series of preferred stock that the Company may issue in the
future.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while
providing flexibility in connection with possible financing, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of holders of Common Stock and, under certain circumstances, be used as a
means of discouraging, delaying or preventing a change in control of the
Company.
The Company currently has outstanding 85,961 shares of Preferred Stock,
which will be called for redemption in connection with the Acquisitions.
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Stock to be
issued in the Acquisitions have been passed upon by Porter & Hedges, L.L.P.,
Houston, Texas. Certain tax matters relating to the Acquisition have been passed
on by Chamberlain, Hrdlicka, White, Williams & Martin, Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for the years then ended included in this Proxy Statement have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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FRONTIER NATURAL GAS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Financial Statements for the Years Ended December 31, 1997 and 1996
Financial Auditors' Report................................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Operations...................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
FRONTIER NATURAL GAS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Frontier Natural Gas Corporation
We have audited the accompanying consolidated balance sheets of Frontier Natural
Gas Corporation and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Frontier Natural Gas
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Houston, Texas
March 27, 1998
F-2
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................................... $ 690,576 $4,956,656
Accounts receivable, net of allowance for doubtful accounts of $15,488 at December
31, 1997 and $10,533 at December 31, 1996........................................ 221,864 366,498
Prepaid expenses and other......................................................... 249,328 282,317
Receivables from affiliates........................................................ 105,171 152,419
------------- ------------
Total current assets............................................................. 1,266,939 5,757,890
Property and equipment:
Gas and oil properties, at cost--successful efforts method of accounting........... 3,235,848 5,280,115
Other property and equipment....................................................... 1,169,127 1,074,727
------------- ------------
4,404,975 6,354,842
Less accumulated depletion, depreciation and amortization.......................... (1,260,605) (2,918,918)
------------- ------------
3,144,370 3,435,924
Other Assets......................................................................... 164,699 437,378
------------- ------------
Total assets..................................................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 911,396 $ 725,222
Revenue distribution payable....................................................... 68,131 360,163
Current portion of long-term debt.................................................. 401,085 304,540
Accrued and other liabilities...................................................... 362,578 208,931
------------- ------------
Total current liabilities........................................................ 1,743,190 1,598,856
Long-term debt....................................................................... 22,680 325,394
Non-recourse debt.................................................................... 864,000 681,618
Accrued interest on non-recourse debt................................................ 131,400 62,874
Other long-term liabilities.......................................................... 9,918 223,624
------------- ------------
Total liabilities................................................................ 2,771,188 2,892,366
Commitments and contingencies:
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value; 5,000,000 shares authorized;
85,961 shares issued and outstanding at December 31, 1997 and 1996; ($856,910
aggregate redemption and liquidation preference at December 31, 1997 and 1996)... 860 860
Common stock:
Class A Common stock, $.01 par value; 40,000,000 shares authorized; 9,935,906 and
9,865,906 outstanding at December 31, 1997 and December 31, 1996,
respectively................................................................... 99,359 98,659
Unamortized value of warrants issued............................................... (27,163) (54,325)
Common stock subscribed............................................................ -- 45,000
Common stock subscription receivable............................................... -- (45,000)
Additional paid-in capital......................................................... 14,668,626 14,599,326
Accumulated Deficit................................................................ (12,936,862) (7,905,694)
------------- ------------
Total stockholders' equity....................................................... 1,804,820 6,738,826
------------- ------------
Total liabilities and stockholders' equity....................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Gas and oil revenues.............................................................. $ 664,126 $ 3,176,861
Realized gain (loss) on commodity transactions.................................... (375,410) (814,029)
Unrealized loss on commodity transactions......................................... (128,936)
Gain on sale of assets............................................................ 452,020 250,437
Operating fees.................................................................... 55,021 213,834
Other revenues.................................................................... 241,788 339,689
------------- -------------
Total revenues.................................................................. 908,609 3,166,792
------------- -------------
Costs and expenses:
Lease operating expense........................................................... 427,240 556,925
Production taxes.................................................................. 24,497 207,969
Transportation and gathering costs................................................ 143,265 368,716
Gas purchases under deferred contract............................................. -- 82,461
Depletion, depreciation and amortization.......................................... 315,880 2,237,648
Impairment of oil and gas properties.............................................. 349,384 51,000
Exploration costs................................................................. 2,258,702 1,317,161
Interest expense.................................................................. 60,942 783,872
Deferred gas contract settlement.................................................. -- 368,960
General and administrative expense................................................ 2,070,812 2,217,099
Delay Rentals..................................................................... 211,690 --
------------- -------------
Total costs and expenses........................................................ 5,862,412 8,191,811
------------- -------------
Loss before provision for income taxes.............................................. (4,953,803) (5,025,019)
Benefit (provision) for income taxes................................................ -- --
------------- -------------
Net loss............................................................................ (4,953,803) (5,025,019)
Cumulative preferred stock dividend................................................. 103,153 103,153
------------- -------------
Net loss applicable to common stockholders.......................................... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
$ (0.51) $ (0.72)
Weighted average number of common shares outstanding................................ 9,877,865 7,142,056
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON UNAMORTIZED
PREFERRED STOCK SHARES VALUE OF ADDITIONAL
------------------------ -------------------- WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ISSUED CAPITAL DEFICIT
----------- ----------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 85,961 $ 860 5,058,406 $ 50,584 -- $ 7,866,879 $ (2,854,887)
Issuance of common stock........ -- -- 4,807,500 48,075 -- 6,616,947 --
Warrant issued for services..... -- -- -- -- $ (82,500) 115,500 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (25,788)
Amortization of warrants........ 28,175
Net loss........................ -- -- -- -- -- -- (5,025,019)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1996...... 85,961 860 9,865,906 98,659 (54,325) 14,599,326 (7,905,694)
----------- ----- --------- --------- ------------ ----------- ------------
Issuance of common stock........ -- -- 70,000 700 -- 69,300 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (77,365)
Amortization of warrants........ -- -- -- -- 27,162 -- --
Net loss........................ -- -- -- -- -- -- (4,953,803)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1997...... 85,961 $ 860 9,935,906 $ 99,359 $ (27,163) $14,668,626 $(12,936,862)
----------- ----- --------- --------- ------------ ----------- ------------
----------- ----- --------- --------- ------------ ----------- ------------
</TABLE>
The accommpanying notes are an integral part of these financial statements.
F-5
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (4,953,803) $ (5,025,019)
Adjustments to reconcile net loss to net cash (used) in operating activities:
Depletion, depreciation and amortization....................................... 315,880 2,237,648
Impairment of oil and gas properties........................................... 349,384 51,000
Deferred gas contract settlement............................................... -- 368,960
Gain on sale of assets......................................................... (452,020) (250,437)
Gain on settlement of deferred compensation agreement.......................... (25,794) --
Deferred revenues under gas contract........................................... -- (74,400)
Amortization of financing costs and warrants................................... 46,128 710,573
Unrealized loss on commodity transitions....................................... 128,936 --
Exploration costs.............................................................. 2,258,702 1,317,161
Changes in operating assets and liabilities:
Trade and affliliate receivables............................................. 191,882 303,975
Prepaid expenses and other................................................... 198,418 (103,580)
Other assets................................................................. 272,679 (191,791)
Accounts payable............................................................. 186,174 (279,119)
Revenue distribution payable................................................. (292,032) (132,909)
Accrued and other............................................................ (118,936) (2,647)
------------- -------------
Net cash (used) in operating activities........................................ (1,894,402) (1,070,585)
------------- -------------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties..................................... (3,023,253) (3,515,841)
Capital expenditures--other property and equipment............................... (159,679) (203,808)
Proceeds from sale of assets..................................................... 1,002,540 4,671,088
------------- -------------
Net cash provided by (used) in investing activities............................ (2,180,392) 951,439
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of debt................................................... 182,382 4,717,280
Repayments of long-term debt..................................................... (296,303) (3,745,369)
Debt issuance cost............................................................... -- (183,387)
Payment for settlement of deferred gas contract.................................. -- (2,181,489)
Preferred stock dividends paid................................................... (77,365) (25,788)
Net proceeds from issuance of common stock....................................... -- 6,430,647
------------- -------------
Net cash (used) in by financing activities..................................... (191,286) 5,011,894
------------- -------------
Net increase (decrease) in cash and cash equivalents............................. (4,266,080) 4,892,748
Cash and cash equivalents at beginning of year..................................... 4,956,656 63,908
------------- -------------
Cash and cash equivalents at end of year........................................... $ 690,576 $ 4,956,656
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................... $ 141,356 $ 818,769
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statments.
F-6
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION--The Company's primary business activities include gas
and oil exploration, production and sales, primarily in the Southwestern and
Gulf Coast areas of the United States. The accompanying consolidated financial
statements include the accounts of the Company, and its subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS--The Company considers all investments with a maturity of
three months or less when purchased to be cash equivalents.
GAS AND OIL PROPERTIES--The Company uses the successful efforts method of
accounting for gas and oil exploration and development costs. All costs of
acquired wells, productive exploratory wells, and development wells are
capitalized. Exploratory dry hole costs, geological and geophysical costs, and
lease rentals on non-producing leases are expensed as incurred. Gas and oil
leasehold acquisition costs are capitalized. Costs of unproved properties are
transferred to proved properties when reserves are proved. Gains or losses on
sale of leases and equipment are recorded in income as incurred. Valuation
allowances are provided if the net capitalized costs of gas and oil properties
at the field level exceed their realizable values based on expected future cash
flows. Unproved properties are periodically assessed for impairment and, if
necessary, a loss is recognized by providing an allowance.
The costs of multiple producing properties acquired in a single transaction
are allocated to individual producing properties based on estimates of gas and
oil reserves and future cash flows.
Depletion is provided by the unit of production method based upon reserve
estimates. Depletion, depreciation and amortization includes approximately
$349,384 and $51,000 in 1997 and 1996, respectively, in impairment of gas and
oil properties, due to changes in reserve estimates.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment is carried at
cost. The Company provides for depreciation of other property and equipment
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years.
Upon sale or retirement of an asset, the cost of the asset disposed of and
the related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in income.
INCOME TAXES--The Company accounts for income taxes on an asset and
liability method which requires the recognition of deferred tax liabilities and
assets for the tax effects of temporary differences between the financial and
tax bases of assets and liabilities, operating loss carryforwards, and tax
credit carryforwards.
COMMODITY TRANSACTIONS--The Company attempts to minimize the price risk of a
portion of its future oil and gas production with commodity futures contracts.
Gains and losses on these contracts are recognized in the period in which
revenue from the related gas and oil production is recorded or when the
contracts are closed. To the extent that the quantities hedged under the
commodity transaction exceed current production, the Company recognizes gains or
losses on the overhedged amount.
F-7
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred on
exploration projects. The interest capitalized for the years ended December 31,
1997 and 1996 was approximately $235,977 and $107,000, respectively.
GAS BALANCING--The Company records gas revenue based on the entitlement
method. Under this method, recognition of revenue is based on the Company's
pro-rata share of each well's production. During such time as the Company's
sales of gas exceed its pro-rata ownership in a well, a liability is recorded,
and conversely a receivable is recorded for wells in which the Company's sales
of gas are less than its pro-rata share. At December 31, 1997, the Company's gas
balancing position was approximately 29,244 MCF overproduced.
EXPLORATION COSTS--The Company expenses exploratory dry hole costs,
geological and geophysical costs, and impairment of unproved properties. During
1996, $43,000 of such costs represented geological and geophysical costs
expensed as required under the successful efforts method of accounting. There
were no such costs incurred in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial Accounting
Standards No. 107. "Disclosures about Fair Value of Financial Instruments"
requires disclosure regarding the fair value of financial instruments for which
it is practical to estimate that value. The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, approximates fair market
value because of the short maturity of those instruments. The fair value of the
Company's long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
The Company has interest rate and gas swap agreements that subject it to
off-balance sheet risk. The unrealized losses on these contracts, as disclosed
in the following footnotes, are based on market quotes. These unrealized losses
are not recorded in the consolidated financial statements to the extent the
swaps qualify for hedge accounting.
STOCK-BASED COMPENSATION--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 establishes a
fair value method and disclosure standards for stock-based employee compensation
arrangements, such as stock purchase plans and stock options. It also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees, requiring that such transactions be accounted
for based on fair value. As allowed by SFAS 123, the Company will continue to
follow the provisions of Accounting Principles Board Opinion No. 25 ("APB") for
its stock-based employee compensation arrangements. SFAS 123 requires entities
that elect to continue to measure compensation cost using APB 25 to disclose
proforma information computed as if the fair value based accounting method of
SFAS 123 had been applied for all awards granted after December 15, 1994.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share" and Statement of Financial Accounting Standards No. 129
("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires restatement of all prior-period EPS data presented. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. Basic earnings per share has been computed by dividing net income to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income to common
shareholders (as adjusted) by the weighted
F-8
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
average number of common shares outstanding plus dilutive potential common
shares. For the years ended December 31, 1997 and 1996 all potentially diluted
securities are anti-dilutive and therefore are not included in the earnings per
share calculation.
The following table presents information necessary to calculate basic and
diluted earnings per share for periods indicated, with 1996 being restated to
conform with the requirements of the Statement of Financial Accounting Standards
No. 128 Earning Per Share, described below.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted Average Common Shares Outstanding....................................... 9,877,865 7,142,056
Basic (Loss) Per Share........................................................... $ (0.51) $ (0.72)
------------- -------------
------------- -------------
EARNINGS FOR BASIC COMPUTATION
Net (Loss)....................................................................... $ (4,953,803) $ (5,025,019)
Preferred Share Dividends........................................................ (103,153) (103,153)
------------- -------------
Net Income (Loss) to Common Shareholders (Basic (Loss) Per Share Computation).... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
</TABLE>
RECLASSIFICATION--Certain reclassifications have been made to the 1996
financial statements to conform them to the classification used in 1997.
2. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. The Company has
experienced a significant decline in operations including declines in ongoing
gas and oil production. These declines have created a significant working
capital deficit and depleted cash reserves. As a result of the declining
positions, the Company has also failed to meet its financial debt covenants
although it has secured a waiver through the earlier of the consummation of the
Acquisitions or June 1998. In the event that the Company is not able to secure
future waivers and the debt is ultimately called, the Company may not be able to
timely meet this demand.
The Company has prepared an operating budget for 1998 which projects a
negative cash flow. Such negative cash flows are expected to further deplete
existing cash balances. The Company has obtained a bridge financing arrangement
from Duke Energy Financial Services, Inc. in connection with the proposed
Acquisitions discussed in Note 10. If the Company is unsuccessful in its attempt
to finalize the proposed Acquisitions and secure permanent financing, the
Company believes it will be unable to continue to meet its current obligations
during 1998 and beyond without selling substantial interests in its exploration
projects. The Company is actively pursuing completion of the proposed
Acquisitions and permanent financing.
3. STOCKHOLDERS' EQUITY:
Effective November 12, 1993, the Company completed its initial public
offering of 350,000 Units of its securities. Each unit consisted of two (2)
shares of cumulative convertible preferred stock (valued at $10.00 per share),
one (1) share of common stock (valued at $4.00) and one (1) warrant ("Series A
Warrant") (valued at $0.10). During 1995, the Company offered to exchange one
(1) share of cumulative convertible
F-9
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
preferred stock plus all unpaid and accrued preferred dividends for four (4)
shares of common stock and two (2) Series A Warrants for a limited period. The
Company concluded its offer on May 26, 1995 with a total of 603,939 shares of
convertible preferred stock tendered. As a result of the offering, the Company
issued 2,415,756 shares of Common Stock and 1,207,878 Series A Warrants. After
May 26, 1995, the exchange ratio reverted to the original conversion terms. The
Company reflected the market value of the additional two shares of common stock
paid as a one-time premium to induce conversion of the cumulative convertible
preferred stock as an addition to net loss in computing loss applicable to
common shareholders in the amount of $2,415,756. The Company was relieved of
$232,285 of accrued dividends relating to the shares tendered, which has been
offset against the inducement premium. As of December 31, 1997 and 1996, 85,961
shares of cumulative convertible preferred stock were outstanding.
In connection with the debt financing obtained during the first quarter of
1996, the Company, pursuant to an agreement with a financial advisor, agreed to
pay a combination of cash, stock and warrants (See--"Warrants") in consideration
for assisting with obtaining the financing. The Company paid $200,000 in cash
and issued 150,000 shares of the Company's common stock to the advisor on June
6, 1996. These shares have been valued at $234,375, the fair market value at the
date granted.
On August 14, 1996, the Company closed the sale of a public offering of
1,350,000 Units of its securities. Subsequently, the Company sold an additional
over all allotment of 202,500 Units. Each Unit consisted of three shares of
Common Stock and three (3) Series B Redeemable Common Stock Purchase Warrants
("Series B Warrants"). The price for each Unit was $5.0625. The net proceeds,
after underwriter's commission and expenses, was approximately $6,431,000.
CONVERTIBLE PREFERRED STOCK--The Board of Directors of the Company has
adopted a Certificate of Designations creating a series of convertible preferred
stock consisting of 1,000,000 shares, par value $.01 per share, none of which
was outstanding as of December 31, 1997 and 1996. Shares of the convertible
preferred stock may be issued from time to time in one or more series with such
designations, voting powers, if any, preferences, and relative participating,
optional or other special rights, and such qualifications, limitations and
restrictions thereof, as are determined by resolution of the Board of Directors
of the Company. However, the holders of the shares of the convertible preferred
stock will not be entitled to receive liquidation preference of such shares,
until the liquidation preference of any other series or class of the Company's
stock hereafter issued that ranks senior as to liquidation rights to the
cumulative convertible preferred stock has been paid in full.
CUMULATIVE CONVERTIBLE PREFERRED STOCK--Holders of shares of cumulative
convertible preferred stock will be entitled to receive, when and if declared by
the Board of Directors out of funds at the time legally available, cash
dividends at a maximum annual rate of $1.20 per share, payable quarterly,
commencing 90 days after the date of first issuance. Dividends are cumulative
from the date of issuance of the cumulative convertible preferred stock. During
1997 and 1996, $77,365 and $25,788 was declared and paid in cumulative preferred
stock dividends. The Company has undeclared and unpaid dividends in the amount
of $180,518 ($1.50 per share) on its cumulative preferred stock for the period
from May 1, 1995 to December 31, 1997. The Company is not required to declare
and pay such dividends; however, until such dividends are paid current, the
Company is precluded from paying dividends to its common shareholders.
In the event of any liquidation, dissolution or wind-up of the Company,
holders of shares of cumulative convertible preferred stock are entitled to
receive the liquidation preference of $10.00 per share, plus an amount equal to
any accrued and unpaid dividends to the payment date, before any payment
F-10
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
or distribution is made to the holders of common stock, or any series or class
of the Company's stock hereafter issued, that will rank junior as to liquidation
rights to the cumulative convertible preferred stock.
The holders of cumulative convertible preferred stock will not have voting
rights except as required by law in connection with certain defaults and as
provided to approve certain future actions including any changes in the
provisions of the stock or the issuance of additional shares equal or senior to
the stock. Whenever dividends on the cumulative convertible preferred stock have
not been paid in an aggregate amount equal to at least six quarterly dividends,
the number of directors of the Company will be increased by two and the holders
of preferred stock will be entitled to elect these additional directors.
REDEMPTION--The cumulative convertible preferred stock is redeemable for
cash, in whole or in part, at the option of the Company, at $10.00 per share,
plus any accrued and unpaid dividends, whether or not declared.
OPTIONAL CONVERSION--At any time after the initial issuance of the
cumulative convertible preferred stock and prior to the redemption thereof, the
holders of cumulative convertible preferred stock shall have the right,
exercisable at their option, to convert any or all of such shares into common
stock at the rate of conversion described below. During 1997 no shares of
cumulative convertible preferred stock were converted to common stock under the
original conversion terms. Automatic Conversion--If, at any time after the
initial issuance thereof, the last reported sales price of the cumulative
convertible preferred stock as reported on the NASDAQ System (or the closing
sale price as reported on any national securities exchange on which the
cumulative convertible preferred stock is then listed), shall, for a period of
10 consecutive trading days, exceed $13.00, then, effective as of the closing of
business on the tenth such trading day, all shares of cumulative convertible
preferred stock then outstanding shall immediately and automatically be
converted into shares of common stock and warrants at the rate of conversion
described below.
CONVERSION RATE--The conversion rate for the cumulative convertible
preferred stock (i.e., the number of shares of common stock into which each
share of cumulative convertible preferred stock is convertible) is determined by
dividing the conversion price then in effect by $5.00. The initial conversion
price is $10.00; therefore, the cumulative convertible preferred stock is
initially convertible into common stock and Series A Warrants at the conversion
rate of two (2) shares of common stock and two (2) Series A Warrants for each
share of cumulative convertible preferred stock converted.
WARRANTS--Each Series A Warrant issued in the initial public offering and in
the conversion of the cumulative convertible preferred stock entitles the holder
thereof to purchase one (1) share of common stock at a price equal to $6.00,
until five years from the effective date of the initial public offering. The
Warrants will, unless exercised or amended, expire on November 13, 1998.
Outstanding Series A Warrants may be redeemed by the Company for $.25 each on 30
days notice. As of December 31, 1997 and 1996, there were 1,578,078 Series A
Warrants outstanding.
Each Series B Warrant issued in the August 1996 public securities offering
entitles the holder to purchase one (1) share of common stock for $2.025
commencing August 8, 1997, and ending August 8, 2001. Each Series B Warrant is
redeemable by the Company with the prior consent of the underwriter at a price
of $0.01 per Series B Warrant, at any time after the Series B Warrants become
exercisable, upon not less than 30 days notice, if the last sale price of the
common stock has been at least 200% of the then exercise price of the Series B
Warrants for the 20 consecutive trading days ending on the third day prior to
the date on which the notice of redemption is given.
F-11
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
The Company has also issued a common stock warrant to purchase 25,000 shares
of common stock at $4.00 per share in connection with a loan agreement. This
warrant expires five (5) years from the effective date of the Company's initial
public offering. The loan was paid in full in 1993.
The Company and Hi-Chicago Trust agreed to a settlement in December 1995
whereby the Company issued 75,000 shares of common stock and a stock purchase
warrant to purchase up to 300,000 shares of common stock at an exercise price of
$3.00 per share to settle a claim asserted by Hi-Chicago Trust. The warrant is
exercisable through the earlier of 60 months from the settlement date or for a
period of 30 days after the closing bid price of the Company's stock equals or
exceeds $6.00 per share for sixty consecutive trading days. The issued shares
are unregistered.
In 1996, the Company issued to a bank providing financing, a warrant to
purchase up to 250,000 shares of common stock for a period of five years
beginning January 3, 1996, at an exercise price of the highest average of the
daily closing bid prices for thirty (30) consecutive trading days between
January 1, 1996, and June 30, 1996. The Company has recorded the warrants at a
value of approximately $82,500 as unamortized value of warrants issued. The
warrants are being amortized using the interest method with an unamortized
balance of $27,163 at December 31, 1997.
The Company has also issued a warrant to purchase 250,000 shares of the
Company's common stock at $2.00 per share to a financial advisor. The warrant
has a five year term commencing on January 12, 1996 and provides for
anti-dilution protection, registration rights, and permits partial exercise at
the election of the holder by exchanging the warrants with appreciated value
equal to each exercise price in lieu of cash. If additional funds are not
borrowed from the bank, a portion of the warrants will be returned. The Company
has recorded the warrants, which are not subject to return at their fair value
of approximately $33,000. The warrants subject to return will be recorded when
additional funds are borrowed.
On January 15, 1997, the Board of Directors authorized the Company to enter
into an agreement with Riches In Resources, Inc. to perform investor relations
services for the Company on a fee basis through January 15, 1999, and month to
month thereafter, which fee may be paid either in cash or in common stock at the
election of the Company. The Company elected to compensate Riches In Resources,
Inc. partially in cash and partially in stock, therefore Riches In Resources,
Inc. was issued 70,000 shares of common stock during 1997. At December 31, 1997,
the Company had prepaid consultant cost of $17,701 in association with this
transaction.
In the first quarter of 1998, the Company in connection with a financing
arrangement, issued warrants to purchase 150,000 shares of Common Stock at an
exercise price of $.50 per share.
EMPLOYEE OPTION PLAN--1997--The plan authorizes the issuance of up to
695,350 options to purchase one (1) share of common stock. Options to purchase
601,000 shares of common stock at prices ranging from $0.63 to $1.88 are
currently outstanding of which 31,000 expire in June of 1998.
Under the plan, the Board may grant options to officers and other employees
and shall provide for an automatic receipt of options by directors who are not
full time employees. Each option shall consist of an option to purchase one
share of common stock at an exercise price that shall be at least the fair
market value of the Common stock on the date of the grant of the option.
However, the Board may authorize vesting options as it deems necessary; such is
the case of certain officers reissued options under this plan during 1997.
Unless otherwise so designated, the options shall be exercisable at a rate of
33 1/3% on January 1, the year following the effective date of the grant, and
33 1/3% each January 1 thereafter. The Option
F-12
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
holder's right is cumulative. Unless otherwise designated by the Board, if the
employment of the Option holder is terminated for any reason, all unexercised
Options shall terminate, be forfeited and shall lapse within three months
thereafter. The options have a maximum life of ten years from the date of
issuance.
STOCK INCENTIVE OPTION PLAN--1996--The 1996 stock incentive option plan was
approved by the Company's stockholders in June, 1996, and 350,000 shares of
common stock were initially reserved for issuance thereunder.
Currently, all options under the plan have expired or have been canceled by
the Board of Directors other than 122,000 options currently outstanding, of
which 116,000 expire by June of 1998.
MANAGEMENT INCENTIVE STOCK PLAN
The Plan initially authorized the issuance of up to 240,000 units. Each unit
consists of (i) an option to purchase one (1) share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of the exercise
of the option exceeds the exercise price. Currently all units have expired or
have been canceled by the Board of Directors other than 48,000 units currently
outstanding, 42,000 of which expire by June 1998.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
EMPLOYEE
INCENTIVE MANAGEMENT STOCK INCENTIVE OPTION
STOCK OPTION PLAN INCENTIVE STOCK PLAN OPTION PLAN--1997 PLAN--1997
-------------------- ---------------------- ------------------------ -----------
1997 1996 1997 1996 1997 1996 1997
--------- --------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares available for grant.... -- 180,000 -- 120,000 8,000 350,000 695,350
Shares under option at end Of
period...................... -- 180,000 48,000 112,000 122,000 342,000 601,000
Option price per share........ -- $ 1.679 $2.00-3.50 $2.00-3.50 $1.47-2.125 $1.47-2.125 $0.63-1.88
Shares exerciseable at end Of
period...................... -- 156,000 48,000 102,000 40,666 -- 544,000
Sales exercised during the
Period...................... -- -- -- -- -- -- --
Sales canceled................ 180,000 -- 64,000 120,000 220,000 --
Weighted Option Price......... -- $ 1.679 $ 3.02 $ 3.09 $ 1.67 $ 1.569 $ 0.70
</TABLE>
STOCK OPTION PLANS--The Company has three fixed option plans which reserve
shares of common stock for issuance to executives, key employees and directors.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation cost for the Company's three stock option plans been
determined based on fair value at the grant date for awards in 1997 and 1996
consistent with the provisions of SFAS No. 123, the Company's net
F-13
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
loss applicable to common stockholders and net loss per common and common
equivalent share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss applicable to common stockholders--as reported............................ $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
Net loss applicable to common stockholders--pro forma.............................. $ (5,679,620) $ (5,296,335)
------------- -------------
------------- -------------
Net loss per common and common equivalent share--as reported....................... $ (0.51) $ (0.72)
------------- -------------
------------- -------------
Net loss per common and common equivalent share--pro forma......................... $ (0.57) $ (0.74)
------------- -------------
------------- -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends; expected volatility of 60%; risk-free interest rate
of 5.71% and 6.50% in 1997 and 1996, respectively; and expected lives of five
(5) years.
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction in order to satisfy the Company's need for
additional capital resources. In connection with pursuing such a transaction,
Mr. Berry and Mr. Christofferson entered into Incentive Agreements and Contract
Settlement Agreements with the Company pursuant to which each of Mr. Berry and
Mr. Christofferson are entitled to receive certain Incentive Payments and
Contract Settlement Payments upon the consummation of such a transaction. Their
existing employment agreements will terminate upon the consummation of a
significant corporate transaction.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors which was comprised of Messrs.
Sweeny and Elliott, each of whom was an outside director, recognized that the
expiration of those options would result in a disincentive for Mr. Berry and Mr.
Christofferson to help the Company pursue a significant corporate transaction.
Therefore, the Compensation Committee determined that Mr. Berry's and Mr.
Christofferson's existing stock options should be canceled and replaced with new
stock options that would terminate not sooner than the date their old options
would have expired if their employment with the Company was not terminated. As
an added incentive, the Compensation Committee determined to reprice Mr. Berry's
and Mr. Christofferson's options so they could more readily benefit from any
upturn in the Company's Common Stock trading price upon the consummation of a
significant corporate transaction.
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option reprice date, and
multiplied such average trading price by 65%. The Compensation Committee
believed that the discount to the average trading price was appropriate because
the shares of Common Stock issuable upon exercise of the repriced options would
not be freely tradeable and the discount was
F-14
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
appropriate to reflect the actual fair market value of the illiquid shares that
would be received upon the exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES OF
UNDERLYING MARKET PRICE OF EXERCISE PRICE
OPTIONS/SARS STOCK AT TIME OF AT TIME OF NEW
REPRICED OR REPRICING OR REPRICING OR EXERCISE
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE
- ----------------------------------- --------- ------------- ------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
David W. Berry..................... 12/3/97 120,000(1) $ .97 $ 1.62 $ .63
President and 12/3/97 24,000(2) $ .97 $ 3.10 $ .63
Chief Executive Officer
David B. Christofferson............ 12/3/97 180,000(3) $ .97 $ 1.68 $ .63
Executive Vice 12/3/97 24,000(2) $ .97 $ 3.10 $ .63
President, General 12/3/97 100,000(1) $ .97 $ 1.47 $ .63
Counsel and Secretary
<CAPTION>
LENGTH OF ORIGINAL
OPTION TERM
REMAINING AT DATE
OF REPRICING OR
NAME AMENDMENT (MONTHS)
- ----------------------------------- -------------------
<S> <C>
David W. Berry..................... 102
President and 69
Chief Executive Officer
David B. Christofferson............ 62
Executive Vice 69
President, General 102
Counsel and Secretary
</TABLE>
- ------------------------
(1) Consists of options to purchase shares of Common Stock pursuant to the Stock
Incentive Option Plan--1996.
(2) Consists of units, each of which included an option to purchase one (1)
share of Common Stock and a stock appreciation right ("SAR") equal to two
times the difference between the exercise price of the option and the market
value of the SAR at the date of exercise, so that one (1) unit had the value
of three (3) options, all issued pursuant to the Management Incentive Option
Plan.
(3) Consists of options to purchase 180,000 shares of Common Stock pursuant to
the Company's 1993 Incentive Stock Option Plan.
4. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA:
On September 27, 1996, the Company sold its N.E. Cedardale field located in
Major County, Oklahoma to OXY USA Inc., for consideration totaling $3,550,000
which included cash of $2,840,000 and certain exchange properties which were
concurrently sold to a third party for $710,000. The sale was effective
September 1, 1996 and the Company incurred a loss of $10,523. The properties
sold represented a substantial portion of the Company's production. In
connection with the sale, the Company recorded a loss of $212,000 resulting from
the reduction in the quantity of gas covered by a swap agreement. The Company
sold various other properties in a number of different transactions during 1997
and 1996. These sales resulted in an aggregate gain of approximately $485,813
and $272,000 for 1997 and 1996, respectively.
F-15
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GAS SALE AGREEMENT:
Effective December 1, 1991, the Company entered into a Gas Sale Agreement to
deliver gas to an end-user over a specified period of time in the future.
The Company was committed to deliver 7,100,000 MMBTU of gas to the purchaser
over a period of seven years beginning December 1, 1991. The Company was allowed
to deliver gas to satisfy the commitment from its own reserves or from
purchasing gas on the open market. The Company delivered 44% from purchases on
the open market for the year ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED
DECEMBER 31,
1996 (MMBTU)
---------------
<S> <C>
Gas purchased on open market.................................................. 43,783
Gas delivered from Company reserves........................................... 55,417
------
Total deliveries.............................................................. 99,200
------
------
</TABLE>
The purchase price under the contract was fixed at $1.50 per MMBTU over the
life of the contract. The contract required the prepayment by the purchaser of
$0.75 per MMBTU for the remaining contract obligations. On January 5, 1996, the
Company entered into an agreement with the end user to terminate the Gas Sales
Agreement as of January 31, 1996. The Company paid the end user $2,181,489 which
represents a return of its $.75 advance on 2,490,103 MMBTU of gas plus a
settlement payment of $313,912.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of $293,888 and $493,888 ended
December 31, 1997 and 1996 respectively, interest at LIBOR rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.25% at December 31, 1997 and 1996),
payable in monthly installments, due in various monthly amounts through December,
1998, collateralized by producing oil and gas properties; net of discount of $18,966
and $37,931 ending December 31, 1997 and 1996 respectively.......................... $ 274,922 $ 455,956
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest
accrued at 15%...................................................................... 864,000 681,618
Note payable to bank, interest at 7.49% to 12.5%, payable in monthly installments, due
in various amounts through 2001, collateralized by other property and equipment..... 48,843 73,978
Note payable, interest at 12%, payable monthly, principal due December 31, 1997....... 100,000 100,000
------------ ------------
1,287,765 1,311,552
Less current portion.................................................................. 401,085 304,540
------------ ------------
$ 886,680 $ 1,007,012
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt (excluding non-recourse debt, which is solely
dependent upon the successful development and future production, if any, of the
Starboard Prospect) are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 401,085
1999............................................................... 16,459
2000............................................................... 6,221
2001............................................................... --
2002............................................................... --
</TABLE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000
which was used to terminate the Gas Sales Agreement and repay the deferred gas
revenues incurred under the Gas Sales Agreement, payoff the note payable to a
bank due August 1, 1996, pay the bank fees related to the financing with the
remainder being used to pay current liabilities.
The remaining funds are to be available for specified future drilling and
acquisition activities of the Company subject to the approval of the bank. The
Company repaid a substantial portion of this borrowing with proceeds from the
sale of its N.E. Cedardale properties in September of 1996. Due to this early
repayment of borrowings, the Company reduced debt issuance costs by $293,000 and
discount on notes payable by $207,000 and recorded these amounts as interest
expense. The loan is secured by a mortgage on all of the Company's significant
producing properties. As part of the credit agreement, the Company is subject to
certain covenants and restrictions, among which are the limitations on
additional borrowing, and sales of significant properties, working capital,
cash, and net worth maintenance requirements and a minimum debt to net worth
ratio. As additional consideration for the loan, the Company assigned the bank
an overriding royalty interest in the mortgaged properties. The required
covenants during 1997 are as follows:
<TABLE>
<CAPTION>
COVENANT, AS DEFINED
- --------------------------------------------------------------------------------
<S> <C>
Tangible Net Worth.............................................................. $ 5,000,000
Current Ratio................................................................... 1.1 : 1.0
Debt to Capitalization.......................................................... 0.6 : 1.0
Cash Flow Ratio................................................................. 3.0 : 1.0
Cash on Hand.................................................................... $ 200,000
Working Capital................................................................. $ 400,000
</TABLE>
The Company does not believe it will be able to comply with certain of the
covenants. The Company has obtained a waiver of the covenant through June 30,
1998. Management believes that the Company will require an additional waiver or
waivers during 1998.
In addition, the Company has entered into an interest rate swap guaranteeing
a fixed interest rate of 8.28% on the loan, and the Company will pay fees of
one-eighth of 1% (.0125%) on the unused portion of the commitment amount. The
unrealized loss on the interest rate swap agreement was $28,000 at December 31,
1996. At December 31, 1997 the unrealized loss was $21,910.
F-17
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of evaluation
and development of the project area and provide a non-recourse loan to fund the
Company's 48% share of the leasehold and seismic evaluation costs of the
project. The loan is secured by a mortgage on the Company's interest in the
project. As of December 31, 1997, the Company has received advances aggregating
$864,000 on the non-recourse loan. The non-recourse loan will be paid solely by
the assignment on an 8% overriding royalty interest in the future revenues of
the financed project. Future funding will be provided as costs are incurred.
7. INCOME TAXES:
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net operating tax loss carryforward............................. $ 4,332,710 $ 3,494,442
Property and equipment.......................................... (2,936,284) (1,942,813)
Employee benefits............................................... -- 76,032
Valuation allowance............................................. (3,254,886) (1,627,661)
------------- -------------
Net deferred tax asset (liability)............................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company has recorded a deferred tax valuation allowance since, based on
an assessment of all available historical evidence, it is more likely than not
that future taxable income will not be sufficient to realize the tax benefit.
The Company and its subsidiaries have estimated net operating loss carryforwards
("NOLs") at December 31, 1997, of approximately $12,743,267, which may be used
to offset future taxable income. The operating loss carryforwards expire in the
tax years 2006 through 2012.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes of the Company may be subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, Ownership Change
occurs if during a specified three-year period there are capital stock
transactions, which result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. The Company may have incurred
such an Ownership Change.
8. RELATED PARTY TRANSACTIONS:
The Company made advances to officers and affiliates of the Company during
1997 and 1996 of $48,380 and $51,143, respectively, and received repayments of
$99,216 and $18,741, respectively. The December 31, 1997 and 1996 receivables
include approximately $47,787, from an affiliated partnership for which the
Company serves as the managing general partner. During 1996, as a result of the
Company's relocation, the Company purchased the homes of two officers for a
total aggregate cost of approximately $369,000. The houses were sold for a total
aggregate sales price of approximately $354,000 and the net amount realized by
the Company was approximately $324,000.
F-18
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under lease agreements, which are classified
as operating leases. Lease expense under these agreements was $112,432 in 1997
and $106,440 in 1996. A summary of future minimum rentals on these
non-cancelable operating leases is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 117,068
1999............................................................... $ 117,068
2000............................................................... $ 117,068
2001............................................................... $ 78,045
</TABLE>
The Company has entered into employment agreements with two officers. Two of
these agreements expire December 31, 1999 (and automatically renew for
additional one-year terms each December 31 unless specifically terminated by
either the Company or individual). The Company has entered into an incentive
agreement and a contract settlement agreement with two officers. Their
employment agreements with the Company will be terminated upon the closing of
the Acquisitions.
Pursuant to the incentive agreements and contract settlement agreements, in
the event the Acquisitions are closed, or in the event there is another
transaction which results in a change of control of the Company, it will pay
incentive payments totaling $246,000, as well as contract settlement payments
totaling $246,000. Each of the incentive payments and the contract settlement
payments may be paid in the form of promissory notes due not later than
September 30, 1998.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations, and net cash flows.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
per MMBTU for Mid-Continent gas for the period from April 1, 1996 through
January 31, 1999. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. The total
unrealized loss on the amended swap agreement was 128,936 at December 31, 1997.
The Company has a hedge in place, which limits the potential cost per MMBTU it
may have to settle at a price of $3.13 per MMBTU, for 31,250 MMBTU per month in
January and February 1998.
10. SUBSEQUENT EVENT
On January 19, 1998, the Company entered into the Acquisition Agreement with
Esenjay Petroleum Corporation ("Esenjay") and Aspect Resources LLC ("Aspect")
(the "Acquisition Agreement"). Pursuant to the terms and conditions of the
Acquisition Agreement and subject to approval by the Company's shareholders the
Company will purchase from Esenjay (the "Esenjay Assets") and Aspect (the
"Aspect Assets") certain undeveloped oil and gas exploration projects in the
onshore Gulf Coast area (the "Acquisitions"). The Company will issue up to
30,991,563 shares of Common Stock to Esenjay in exchange for the Esenjay Assets,
and will issue up to 29,648,636 shares of Common Stock to Aspect or its assigns
in exchange for the Aspect Assets. The Company has filed a preliminary Schedule
14A proxy statement in this regard and intends to have a shareholders meeting in
late April or early May of 1998 to seek the
F-19
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT (CONTINUED)
approval of its shareholders of the Acquisitions and related matters. As part of
the Acquisition, the Company intends to redeem its Cumulative Committee
Preferred Stock at its redemption price of $10.00 per share plus all accrued and
unpaid dividends.
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000, and in January and February advanced $500,000 on said
credit facility. The facility was repaid by the Company on February 23, 1998,
when the Company entered into a $7,800,000 credit agreement with Duke Energy
Financial Services, Inc. Said new credit facility provides for up to $4,800,000
prior to closing of the Acquisitions, $1,800,000 of which can be used directly
by the Company and $3,000,000 to be utilized solely to loan to Esenjay to pay
exploratory costs incurred on the Esenjay Assets after the effective date of the
Acquisitions and prior to closing thereof. An additional $3,000,000 will be
available to the Company after closing of the Acquisitions to pay additional
exploratory costs. The credit facility bears interest at a national prime rate
plus 4%. In addition, the lender will be paid cash payments equal to an
overriding royalty of 0.6% of production attributable to the Company's interest
in wells drilled by the Company while the credit facility is outstanding. The
lender also has a right to gather, process, transport and market, at competitive
market rates, natural gas produced from a majority of the projects the Company
intends to acquire pursuant to the Acquisitions. The facility is secured by
mortgages on most of the Company's undeveloped exploration projects. If the
Acquisitions are closed, the assets acquired will be subject to such mortgages.
The facility is repayable in eleven monthly payments equal to 1/30 of the
principal plus interest, plus a final monthly payment of all remaining principal
plus interest commencing August 31, 1998, or sooner in the event the Company
sells interests in the collateral or closes any underwritten public offering of
securities.
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED):
The Company's proved gas and oil reserves are located in the United States.
Proved reserves are those quantities of natural gas and crude oil which, upon
analysis of geological and engineering data, demonstrate with reasonable
certainty to be recoverable in the future from known gas and oil reservoirs
under existing economic and operating conditions (i.e. price and costs as of the
date the estimate is made). Proved developed (producing and non-producing)
reserves are those proved reserves which can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped
gas and oil reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation.
F-20
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
FINANCIAL DATA
The Company's gas and oil producing activities represent substantially all
of the business activities of the Company. The following costs include all such
costs incurred during each period, except for depreciation and amortization of
costs capitalized:
COSTS INCURRED IN GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Acquisition of properties
Proved.................................................................... $ 765,678 $ 1,305,219
Unproved.................................................................. 242,205 644,323
Exploration costs........................................................... 1,861,432 182,147
Development costs........................................................... 153,938 313,152
------------ ------------
Total costs incurred.................................................... $ 3,023,253 $ 2,444,841
------------ ------------
------------ ------------
</TABLE>
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Proved and unproved properties being amortized............................. $ 1,181,811 $ 4,681,518
Unproved properties not being amortized.................................... 2,054,037 598,596
Less accumulated amortization.............................................. (438,044) (2,277,984)
------------ -------------
Net capitalized costs.................................................. $ 2,797,804 $ 3,002,130
------------ -------------
------------ -------------
</TABLE>
ESTIMATED QUANTITIES OF PROVED GAS AND OIL RESERVES:
The estimates of proved producing reserves were estimated. Proved reserves
cannot be measured exactly because the estimation of reserves involves numerous
judgmental and arbitrary determinations.
F-21
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
Accordingly, reserve estimates must be continually revised as a result of new
information obtained from drilling and production history or as a result of
changes in economic conditions.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS
LIQUIDS (BARRELS)
NATURAL GAS (MCF) ---------------------
--------------------------
YEARS ENDED DECEMBER
YEARS ENDED DECEMBER 31, 31,
-------------------------- ---------------------
1997 1996 1997 1996
----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period......................................... 8,901,555 18,564,141 183,735 279,501
Purchases of minerals-in-place.............................. -- 2,615,187 -- 84,096
Sales of minerals-in-place.................................. (159,528) (10,092,754) (3,857) (187,006)
Revisions of previous estimates............................. (3,129,076) (791,059) (59,121) 8,534
Extensions, discoveries and other additions................. 8,715 12,056 928 7,886
Production.................................................. (121,304) (1,406,016) (7,286) (9,276)
----------- ------------- --------- ----------
End of period............................................... 5,500,363 8,901,555 114,399 183,735
----------- ------------- --------- ----------
----------- ------------- --------- ----------
Proved developed reserves:
Beginning of period......................................... 985,524 7,307,717 46,420 72,515
----------- ------------- --------- ----------
----------- ------------- --------- ----------
End of period............................................... 521,345 985,524 24,358 46,420
----------- ------------- --------- ----------
----------- ------------- --------- ----------
</TABLE>
Reserves of wells, which have performance history, were estimated through
analysis of production trends and other appropriate performance relationships.
Where production and reservoir data were limited, the volumetric method was used
and it is more susceptible to subsequent revisions.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Board Statement No. 69,
"Accounting for Oil and Gas Producing Activities" and is not intended to be a
"best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price and
cost estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves) would have to be incorporated into the
valuations.
Future net cash inflows are based on the future production of proved
reserves of natural gas, natural gas liquids, crude oil and condensate as
estimated by petroleum engineers by applying current prices of gas and oil (with
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Average year
end prices used in determining future cash inflows for natural gas and oil for
the periods ended December 31, 1997 and 1996 were as follows: 1997--$2.46 per
MCF--Gas, $15.62 per barrel--Oil; 1996--$4.13 per MCF--Gas, $24.42 per
barrel--Oil, respectively. Future net cash flows are then calculated by reducing
such estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved reserves
and by the estimated future income taxes. Estimated future income taxes are
computed by applying the appropriate year-end tax rate to the future pretax net
cash flows relating to the Company's estimated proved oil and gas reserves. The
estimated future income taxes give effect to permanent differences and tax
credits and allowances.
F-22
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
The following table sets forth the Company's estimated standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Future cash inflows................................................................ $ 15,752,040 $ 41,251,837
Future development and production costs............................................ (7,468,887) (8,288,416)
Future income tax expenses......................................................... (365,224) (6,628,489)
------------- -------------
Future net cash flows.............................................................. 7,917,929 26,334,932
Discount........................................................................... (4,019,429) (9,576,388)
------------- -------------
Standardized measure of discounted future net cash flows........................... $ 3,898,500 $ 16,758,544
------------- -------------
------------- -------------
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Standardized measure of discounted future cash flows--beginning of period......... $ 16,758,544 $ 16,404,620
Sales of oil and gas produced, net of operating expenses.......................... (312,198) (1,977,577)
Net changes in sales prices and production costs.................................. (10,601,580) 7,177,867
Extensions, discoveries and improved recovery, less related costs................. 30,952 187,877
Change in future development costs................................................ (433,134) (17,400)
Previously estimated development costs incurred during the year................... 162,610 115,440
Revisions of previous quantity estimates.......................................... (4,973,603) (1,940,104)
Accretion of discount............................................................. 2,169,632 2,004,973
Net change of income taxes........................................................ 4,810,619 (1,292,670)
Purchases of minerals-in-place.................................................... -- 7,787,886
Sales of minerals-in-place........................................................ (371,728) (11,270,558)
Changes in production rates (timing) and other.................................... (3,341,614) (421,810)
-------------- --------------
Standardized measure of discounted future cash flows--end of period............... $ 3,898,500 $ 16,758,544
-------------- --------------
-------------- --------------
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
F-23
<PAGE>
APPENDIX A
ACQUISITION AGREEMENT
AND
PLAN OF EXCHANGE
REGARDING
THE ACQUISITION OF CERTAIN ASSETS OF
ESENJAY PETROLEUM CORPORATION
AND
ASPECT RESOURCES LLC
BY
FRONTIER NATURAL GAS CORPORATION
JANUARY 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
DEFINITIONS......................................................................................... 1
1.01 Defined Terms....................................................................................... 1
1.02 References and Titles............................................................................... 8
1.03 Knowledge........................................................................................... 8
1.04 Adequacy of Disclosure.............................................................................. 8
1.05 Supplemental Property Schedules..................................................................... 9
ARTICLE II
ACQUISITION OF ESENJAY ASSETS....................................................................... 9
2.01 Contribution of Esenjay Assets...................................................................... 9
2.02 Assumed Liabilities................................................................................. 9
2.03 Esenjay Employees...................................................................................
2.04 Non-Assignable Rights............................................................................... 11
ARTICLE III
ACQUISITION OF ASPECT ASSETS........................................................................ 11
3.01 Contribution of Aspect Assets....................................................................... 11
3.02 Assumed Liabilities; Permitted Asset Sales; Adjustments............................................. 11
3.03 Non-Assignable Rights............................................................................... 12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO FRONTIER............................................. 13
4.01 Organization, Standing and Qualification............................................................ 13
4.02 Execution, Delivery and Performance of Agreement; Authority......................................... 13
4.03 Conflicts........................................................................................... 14
4.04 SEC Documents; Financial Statements; Liabilities.................................................... 14
4.05 Capitalization...................................................................................... 15
4.06 Accounts Receivable, Payable........................................................................ 15
4.07 Absence of Events................................................................................... 15
4.08 Contracts........................................................................................... 16
4.09 Taxes............................................................................................... 17
4.10 Litigation.......................................................................................... 18
4.11 Compliance with Laws, Material Agreements and Permits............................................... 18
4.12 Tax Representations................................................................................. 18
4.13 Environmental Matters............................................................................... 19
4.14 Books and Records................................................................................... 20
4.15 Gas Imbalances...................................................................................... 20
4.16 Title to Assets other than Oil and Gas Interests.................................................... 20
4.17 Title to Oil and Gas Interests...................................................................... 20
4.18 Oil and Gas Operations.............................................................................. 21
4.19 No Guarantees....................................................................................... 21
4.20 Employee Matters.................................................................................... 21
4.21 Employee Benefit Plans.............................................................................. 21
4.22 Broker/Finders...................................................................................... 23
4.23 Royalties........................................................................................... 23
4.24 Plugging and Abandonment Liabilities................................................................ 23
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
4.25 Prepayments......................................................................................... 23
4.26 Hedging Activities.................................................................................. 23
4.27 Transactions With Related Parties................................................................... 23
4.28 Disclosure.......................................................................................... 24
ARTICLE V
FINANCIAL ADVISOR................................................................................... 24
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ESENJAY........................................................... 24
6.01 Organization, Standing and Qualification............................................................ 24
6.02 Execution, Delivery and Performance of Agreement; Authority......................................... 24
6.03 Conflicts........................................................................................... 25
6.04 Capitalization...................................................................................... 25
6.05 Financial Statements................................................................................ 25
6.06 Absence of Undisclosed Liabilities.................................................................. 25
6.07 Absence of Events................................................................................... 25
6.08 Taxes............................................................................................... 26
6.09 Litigation.......................................................................................... 27
6.10 Compliance with Laws, Material Agreements and Permits............................................... 27
6.11 Environmental Matters............................................................................... 27
6.12 Title to Assets other than Oil and Gas Interests.................................................... 28
6.13 Title to Oil and Gas Interests...................................................................... 28
6.14 Broker/Finders...................................................................................... 28
6.15 Royalties........................................................................................... 29
6.16 Gas Imbalances...................................................................................... 29
6.17 Hedging Activities.................................................................................. 29
6.18 Certain Business Relationships or Transactions with Affiliates...................................... 29
6.19 No Guarantees....................................................................................... 29
6.20 Employee Matters.................................................................................... 29
6.21 Employee Benefit Plans.............................................................................. 29
6.22 Plugging and Abandonment Liabilities................................................................ 31
6.23 Prepayments......................................................................................... 31
6.24 Calls on Production................................................................................. 31
6.25 Oil and Gas Operations.............................................................................. 31
6.26 Tax Representations................................................................................. 32
6.27 Disclosure.......................................................................................... 32
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF ASPECT............................................................ 33
7.01 Organization, Standing and Qualification............................................................ 33
7.02 Execution, Delivery and Performance of Agreement; Authority......................................... 33
7.03 Conflicts........................................................................................... 33
7.04 Aspect Assets....................................................................................... 33
7.05 Taxes............................................................................................... 33
7.06 Litigation.......................................................................................... 34
7.07 Compliance with Laws, Material Agreements and Permits............................................... 34
7.08 Environmental Matters............................................................................... 34
7.09 Title to Assets other than Oil and Gas Interests.................................................... 35
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
7.10 Title to Oil and Gas Interests...................................................................... 35
7.11 Broker/Finders...................................................................................... 35
7.12 Tax Representations................................................................................. 36
7.13 Disclosure.......................................................................................... 36
ARTICLE VIII
COVENANTS AND OTHER AGREEMENTS...................................................................... 36
8.01 Access to Records and Properties.................................................................... 36
8.02 Operation of the Business........................................................................... 37
8.03 Consents............................................................................................ 38
8.04 Announcements....................................................................................... 38
8.05 No Solicitations.................................................................................... 38
8.06 Notification of Certain Matters..................................................................... 39
8.07 Financing Covenants................................................................................. 39
8.08 Public Equity Transaction........................................................................... 40
8.09 Reconstituted Frontier Board of Directors........................................................... 40
8.10 Management of Frontier.............................................................................. 40
8.11 Registration Statement and Proxy Statement/Prospectus; Frontier Stockholders' Meeting............... 40
8.12 Tax Cooperation..................................................................................... 42
8.13 Name Change......................................................................................... 42
8.14 Frontier Ownership Dilution......................................................................... 42
8.15 Liabilities and Obligations of Esenjay and Aspect................................................... 42
8.16 Esenjay Wind-down................................................................................... 42
ARTICLE IX
CONDITIONS.......................................................................................... 43
9.01 Conditions to Obligations of Esenjay and Aspect..................................................... 43
9.02 Conditions to Obligations of Frontier............................................................... 43
9.03 Conditions to Obligations of All Parties............................................................ 44
ARTICLE X
DELIVERIES.......................................................................................... 45
10.01 Deliveries by Frontier.............................................................................. 45
10.02 Deliveries by Esenjay............................................................................... 46
10.03 Deliveries by Aspect................................................................................ 46
ARTICLE XI
VALUATION ADJUSTMENTS FOR TITLE DEFECTS............................................................. 47
11.01 Buyer and Seller.................................................................................... 47
11.02 Allocated Value of Oil and Gas Interests............................................................ 48
11.03 Notice of Title Defects............................................................................. 48
11.04 Adjustments......................................................................................... 48
11.05 Casualty Loss....................................................................................... 48
11.06 Dispute Resolution.................................................................................. 48
11.07 Preferential Rights and Consents.................................................................... 49
ARTICLE XII
VALUATION ADJUSTMENT FOR ENVIRONMENTAL DEFECTS...................................................... 50
12.01 Environmental Liabilities and Obligations........................................................... 50
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
12.02 Environmental Defect Notice......................................................................... 50
12.03 Remedies............................................................................................ 50
12.04 Contested Environmental Defects..................................................................... 50
12.05 Exclusive Remedies.................................................................................. 51
ARTICLE XIII
TERMINATION......................................................................................... 51
13.01 Termination of Agreement............................................................................ 51
13.02 Obligations Upon Termination........................................................................ 51
13.03 Breakup Fee......................................................................................... 52
ARTICLE XIV
CLOSING............................................................................................. 52
14.01 Time and Place...................................................................................... 52
14.02 Further Assurances.................................................................................. 52
14.03 Concurrent Conditions............................................................................... 52
ARTICLE XV
INDEMNIFICATION..................................................................................... 52
15.01 Indemnification by Frontier......................................................................... 52
15.02 Indemnification by Esenjay.......................................................................... 53
15.03 Indemnification by Aspect........................................................................... 53
15.04 Indemnification Limitations......................................................................... 53
15.05 Notice and Resolution of Claim...................................................................... 53
15.06 Defense of Third Party Claim........................................................................ 54
15.07 Payment............................................................................................. 54
ARTICLE XVI
GENERAL PROVISIONS.................................................................................. 54
16.01 Effect of Due Diligence............................................................................. 54
16.02 Further Assurances.................................................................................. 54
16.03 Survival of Representations, Warranties and Covenants............................................... 54
16.04 Entire Agreement; Amendment and Waiver.............................................................. 54
16.05 Severability........................................................................................ 55
16.06 Applicable Law...................................................................................... 55
16.07 Assignment.......................................................................................... 55
16.08 Notices............................................................................................. 55
16.09 Incorporation of Exhibits and Schedules by Reference................................................ 56
16.10 Binding Effect...................................................................................... 57
16.11 Headings............................................................................................ 57
16.12 Gender and Number................................................................................... 57
16.13 Multiple Counterparts............................................................................... 57
16.14 Expenses............................................................................................ 57
</TABLE>
iv
<PAGE>
ATTACHMENTS
<TABLE>
<S> <C>
EXHIBITS:
Exhibit "A" --Bridge Financing Agreement
Exhibit "B" --Registration Rights Agreement
Exhibit "C" --Assignment, Bill of Sale and Conveyance Agreement (Aspect Assets)
Exhibit "D" --Assignment, Bill of Sale and Conveyance Agreement (Esenjay Assets)
Exhibit "E" --[Intentionally Omitted]
Exhibit "F" --Opinion of Porter & Hedges, L.L.P.
Exhibit "G" --[Intentionally Omitted]
Exhibit "H" --Letter regarding limited guaranty by Esenjay Shareholders
Exhibit "I" --Opinion of Pollicoff, Smith, Myres & Remels, L.L.P.
Exhibit "J" --Letter regarding limited guaranty by Aspect Members
Exhibit "K" --Opinion of Davis, Graham & Stubbs LLP
Exhibit "L" --Prospect Areas
</TABLE>
<TABLE>
<S> <C> <C>
SCHEDULES:
Disclosure
Schedule -- Aspect
Disclosure
Schedule -- Esenjay
Disclosure
Schedule -- Frontier
Schedule 2.01 Esenjay Assets
Schedule 2.02 Assumed Agreements
Schedule 2.04 Esenjay Seismic Agreements
Schedule 3.01 Aspect Assets
Schedule 4.05(a) Frontier Option and Warrant Agreements
Schedule 4.05(b) Frontier Subsidiaries
Schedule 4.06 Frontier Accounts Receivable and Accounts Payable
Schedule 4.07 Frontier Absence of Events
Schedule 4.15 Frontier Gas Imbalances
Schedule 4.17 Frontier Oil and Gas Interests
Schedule 4.18 Frontier Reserve Reports
Schedule 5.01 Agreement with Gaines Berland, Inc.
</TABLE>
v
<PAGE>
ACQUISITION AGREEMENT AND PLAN OF EXCHANGE
This Acquisition Agreement and Plan of Exchange ("Agreement") is executed
and delivered as of January 19, 1998, by and among Frontier Natural Gas
Corporation, an Oklahoma corporation ("Frontier"), Esenjay Petroleum
Corporation, a Texas corporation ("Esenjay"), and Aspect Resources LLC, a
Colorado limited liability company ("Aspect"), with respect to the following:
R E C I T A L S:
A. Frontier, Esenjay and Aspect have determined to engage in a strategic
business combination (the "Exchange") pursuant to which certain assets of
Esenjay and certain assets of Aspect shall be transferred to Frontier in
exchange for capital stock of Frontier, in a transaction intended to qualify
under Section 351 of the Code (as hereinafter defined); and
B. The parties desire to evidence the terms, provisions,
representations, warranties and conditions upon which such Exchange will be
consummated by this binding Agreement.
NOW, THEREFORE, in consideration of the foregoing and the benefits to be
derived from the mutual observance of the terms and conditions set forth below,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 DEFINED TERMS. For purposes of this Agreement, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth in this Article I or in the Section referred to below:
"Accounting Firm" has the meaning set forth in Section 11.06.
"Acquisition Proposal" has the meaning set forth in Section 8.05.
"Agreed Group B Amount" has the meaning set forth in Section 3.02(d).
"Agreement" means this Acquisition Agreement and Plan of Exchange and
the Exhibits and Schedules attached hereto and by this reference made a part
hereof for all purposes.
"Allocated Value" has the meaning set forth in Section 11.02.
"Aspect" has the meaning set forth in the preface above.
"Aspect Assets" shall mean the Oil and Gas Interests and other assets of
Aspect identified on Schedule 3.01 and the Exhibits thereto; it being
understood that (a) such Oil and Gas Interests and other assets represent
less than 100% of Aspect's interest in the properties identified due to
partial interests being retained by Aspect, and (b) Aspect retains and
reserves unto itself all Working Interests and Net Revenue Interests in the
Oil and Gas Interests located in the Prospect Areas and other assets not
specifically identified on Schedule 3.01, including any Net Revenue Interest
available from the Working Interest conveyed to Frontier after applicable
(i) royalties, (ii) overriding royalties, (iii) other burdens out of
production, and (iv) the Net Revenue Interest contributed to Frontier;
provided, however, that all Oil and Gas Interests located in the Prospect
Areas acquired hereafter and/or not listed on Schedule 3.01 shall be owned
in the same pro rata percentages as the properties currently listed in
Schedule 3.01.
"Aspect Employees" means certain of the employees of Aspect in its
Houston office who have received an overriding royalty interest in certain
of the Oil and Gas Interests included in the Aspect Assets.
A-1
<PAGE>
"Aspect Members" means Alex Cranberg, an individual and a resident of
Colorado, Antrim Resources, Inc., a Nevada corporation, and CWS
Limited-Liability Company, a Delaware limited liability company.
"Aspect Participation Agreement" means that certain Participation
Agreement, dated April 24, 1997, by and between Aspect and Esenjay, covering
the Identfied Esenjay Assets.
"Aspect Permits" has the meaning set forth in Section 7.07.
"Assumed Agreements" has the meaning set forth in Section 2.02(d).
"Benefit Arrangement" means any employment, severance or similar
contract, or any other contract, plan, policy or arrangement (whether or not
written) providing for compensation, bonus, profit-sharing, stock option or
other stock related rights or other forms of incentive or deferred
compensation, vacation benefits, insurance coverage (including any
self-insured arrangement), health or medical benefits, disability benefits,
severance benefits and post-employment or retirement benefits (including
compensation, pension, health, medical or life insurance benefits), other
than the Employee Plans, that (a) is maintained, administered or contributed
to by Esenjay or any member of the Frontier Group, as the case may be, and
(b) covers any employee or former employee of any such person.
"Bridge Financing Agreement" shall be that agreement as set forth as
Exhibit "A" attached hereto which is incorporated herein by reference.
"Casualty Loss" has the meaning set forth in Section 11.05.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any successor statutes and any
regulations promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System List.
"Closing" means the taking of the actions contemplated by Article XIV of
this Agreement in order to consummate the Exchange.
"Closing Date" means the date on which the Closing occurs as set forth
in Section 14.01 hereof.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985.
"Code" means the Internal Revenue Code of 1986 as in effect on the date
hereof and as may be amended from time to time.
"Damages" has the meaning set forth in Section 15.01.
"Defect Limit" has the meaning set forth in Section 11.04.
"Defensible Title" means such right, title and interest that is
evidenced by an instrument or instruments whether or not filed of record in
accordance with the conveyance and recording laws of the applicable
jurisdiction to the extent necessary to prevail against competing claims of
bona fide purchasers for value without notice such that: (a) the titled
party shall be entitled to receive from its ownership interest in each of
the titled party's Oil and Gas Interests not less than the interest shown as
the Net Revenue Interest for such Oil and Gas Interest listed in such titled
party's Property Schedule attached hereto in all Hydrocarbons produced,
saved and marketed from each of such Oil and Gas Interests without
reduction, suspension or termination throughout the life of each of such Oil
and Gas Interests, except pursuant to the agreements set forth on such
titled party's Property Schedule; (b) the titled party is obligated to bear
a percentage of the costs and expenses relating to operations on and the
maintenance or development of each of the titled party's Oil and Gas
Interests listed in the Property Schedule of such party not greater than the
interest shown as the Working
A-2
<PAGE>
Interest for each of such Oil and Gas Interests in the titled party's
Property Schedule without increase throughout the life of each of such Oil
and Gas Interests, except pursuant to the agreements set forth on such
titled party's Property Schedule; and (c) the interest of the titled party
in each of the titled party's Oil and Gas Interests is free and clear of all
Liens, claims, infringements, burdens or other defects of any kind
whatsoever, except for Permitted
Encumbrances, which do not materially interfere with the occupation, use and
enjoyment of such properties in the normal course of business as presently
conducted, or materially impair the use or value thereof for such business.
Defensible Title concerning an Option Contract shall apply to the ownership of
the Option Contract and not the minerals described therein.
"Disclosure Schedule" means a Disclosure Schedule attached hereto and
any documents listed on such Disclosure Schedule and expressly incorporated
therein by reference.
"Disputed Matters" has the meaning set forth in Section 11.06.
"DOL" means the Department of Labor.
"Effective Date" shall be November 1, 1997.
"Employee Plan" means a plan or arrangement as defined in Section 3(3)
of ERISA, that (a) is subject to any provision of ERISA, (b) is maintained,
administered or contributed to by Esenjay or any member of the Frontier
Group, as the case may be, and (c) covers any employee or former employee of
any such person.
"Environmental Defect" means a condition in, on, or under the Oil and
Gas Interests (including air, land, soil, surface, subsurface strata,
surface water, groundwater or sediments) that causes an Oil and Gas Interest
to be in violation of, or subject to remediation under, any Environmental
Law.
"Environmental Defect Notice" has the meaning set forth in Section
12.02.
"Environmental Defect Value" has the meaning set forth in Section 12.04.
"Environmental Law" means any federal, state, local or foreign statute,
code, ordinance, rule, regulation, policy, guideline, permit, consent,
approval, license, judgment, order, writ, decree, common law, injunction or
other authorization in effect on the date hereof or at a previous time
applicable to the operations of, as the context requires, relating to (a)
emissions, discharges, releases or threatened releases of Hazardous
Materials into the natural environment, including into ambient air, soil,
sediments, land surface or subsurface, buildings facilities, surface water,
groundwater, publicly-owned treatment works, septic systems or land; (b) the
generation, treatment, storage, disposal, use, handling, manufacturing,
transportation or shipment of Hazardous Materials; (c) occupational health
and safety; or (d) otherwise relating to the pollution of the environment,
solid waste handling treatment or disposal, or operation or reclamation of
oil and gas operations or mines.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Esenjay" has the meaning set forth in the preface above.
"Esenjay Assets" shall mean the Oil and Gas Interests and other assets
of Esenjay identified on Schedule 2.01 and the Exhibits thereto; it being
understood that (a) such Oil and Gas Interests and other assets represent
less than 100% of Esenjay's interest in the properties identified due to
partial interests being retained by Esenjay, and (b) Esenjay retains and
reserves unto itself all Working Interests and Net Revenue Interests in the
Oil and Gas Interests located in the Prospect Areas and other assets not
specifically identified on Schedule 2.01, including any Net Revenue Interest
available from the Working Interest conveyed to Frontier after applicable
(i) royalties, (ii) overriding royalties, (iii) other burdens out of
production, and (iv) the Net Revenue Interest contributed to Frontier;
provided, however, that all Oil and Gas Interests located in the Prospect
Areas acquired hereafter
A-3
<PAGE>
and/or not listed on Schedule 2.01 shall be owned in the same pro rata
percentages as the properties currently listed in Schedule 2.01.
"Esenjay Permits" has the meaning set forth in Section 6.10.
"Esenjay Shareholders" means Michael E. Johnson, an individual and a
Texas resident, and Charles J. Smith, an individual and a Texas resident,
each of whom owns 50% of the issued and outstanding equity securities of
Esenjay and who collectively own all of the outstanding equity securities of
Esenjay.
"Exchange" has the meaning set forth in the recitals above.
"Exchange Act" means the Securities Exchange Act of 1934 as in effect on
the date hereof and as the same may be amended from time to time.
"Frontier" has the meaning set forth in the preface above and shall
include, unless otherwise expressly stated, Frontier Natural Gas Corporation
and its wholly-owned (directly or indirectly) subsidiaries: (a) Frontier
Acquisition Corporation, an Oklahoma corporation, (b) Frontier, Inc., an
Oklahoma corporation, (c) Frontier Exploration & Production Corporation, an
Oklahoma corporation, and (d) Petroleum Acquisition Corporation, a Delaware
corporation.
"Frontier Common Stock" means the shares of common stock, par value
$0.01 per share, of Frontier Natural Gas Corporation.
"Frontier Financial Statements" has the meaning set forth in Section
4.04.
"Frontier Group" has the meaning set forth in Section 4.09.
"Frontier Interim Financial Statements" has the meaning set forth in
Section 4.04.
"Frontier Material Agreement(s)" means any written or oral agreement,
contract, commitment or understanding to which Frontier is a party, by which
Frontier is directly or indirectly bound, or to which any asset of any of
Frontier may be subject, involving total value or consideration in excess of
$100,000.
"Frontier Option Plan" has the meaning set forth in Section 8.14.
"Frontier Permits" has the meaning set forth in Section 4.11.
"Frontier Preferred Stock" has the meaning set forth in Section 4.05.
"Frontier Stockholders' Meeting" has the meaning set forth in Section
8.11.
"GAAP" means generally accepted accounting principles as recognized by
the U.S. Financial Accounting Standards Board.
"GBI" means Gaines Berland, Inc.
"Governmental Action" means any authorization, application, approval,
consent, exemption, filing, license, notice, registration, permit or other
requirement of, to or with any Governmental Authority.
"Governmental Authority" means any national, state, county or municipal
government, domestic or foreign, and any agency, board, bureau, commission,
court, department or other instrumentality of any such government, or any
arbitrator in any case that has jurisdiction over any of the parties hereto
or their assets, tangible or intangible.
"Group A Aspect Assets" shall mean those Aspect Assets identified on
Exhibit C to Schedule 3.01 under the heading "Group A Assets."
A-4
<PAGE>
"Group B Aspect Assets" shall mean those Aspect Assets identified on
Exhibit C to Schedule 3.01 under the heading "Group B Assets."
"Hazardous Material" means (a) any "hazardous substance," as defined by
CERCLA; (b) any "hazardous waste" or "solid waste," in either case as
defined by the Resource Conservation and Recovery Act, as amended; (c) any
solid, hazardous, dangerous or toxic chemical, material, waste or substance,
within the meaning of and regulated by any Environmental Law; (d) any
radioactive material, including any naturally occurring radioactive
material, and any source, special or byproduct material as defined in 42
U.S.C. 2011 et seq. and any amendments thereof; (e) any asbestos-containing
materials in any form or condition; (f) any polychlorinated biphenyl in any
form or condition; or (g) any Hydrocarbons, or any fraction or byproducts
thereof.
"Hydrocarbons" means crude oil, natural gas, casinghead gas, and other
liquid or gaseous hydrocarbons.
"Identified Esenjay Assets" means those properties identified in
Schedule 2.01 as: Tidehaven, El Maton, Midfield, Wolf Point, Hall Ranch,
Hordes Creek, Mikeska, Pile Driver, Houston Endowment, Lipsmacker and
Blessing.
"Initial Bridge Facility" has the meaning set forth in Section 8.07.
"IRS" means the Internal Revenue Service.
"JEDI" has the meaning set forth in Section 3.02(a).
"Lien" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"Material Adverse Effect" means with respect to a party, an event,
change or occurrence which, individually or together with any other event,
change or occurrence has a material adverse impact on (a) the financial
position, business, prospects or results of operations of such party and its
Subsidiaries, taken as a whole, or (b) the ability of such party to perform
its obligations under this Agreement or to consummate the Exchange or the
other transactions contemplated hereby; provided that "material adverse
impact" shall be deemed not to include the impact of (i) changes resulting
from force majeure events beyond the control of a party, (ii) actions or
omissions of a party or any of its Subsidiaries taken with the prior
informed written consent of the other parties, (iii) the drilling of any
successful or unsuccessful well on the Oil and Gas Interests of any of the
parties hereto, (iv) changes in the prices of oil or natural gas, or (v) in
the case of Frontier, its operating results from September 30, 1997 through
the Closing Date provided that such operating results are consistent with
the financial results reflected in the SEC Reports. An event, change or
occurrence shall be deemed to have a "material adverse impact," individually
or together with any other event, change or occurrence if it results in a
liability, claim, obligation, encumbrance or Lien against a party or its
assets or results in a change of financial position, business, prospects or
results of operations of $50,000 in the case of Frontier and $100,000 in the
case of either Aspect or Esenjay.
"Multiemployer Plan" means a plan or arrangement as defined in Section
4001(a)(3) and 3(37) of ERISA.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation system.
"Net Casualty Loss" has the meaning set forth in Section 11.05.
"Net Revenue Interest" means the interest in all Hydrocarbons produced
from a well, lease or any unit of which a lease is a part which is
attributable to: (a) the Working Interests therein after payment of
applicable lessor royalties, overriding royalties, production payments and
other payments
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out of or measured by the production of Hydrocarbons from the well or
property covered by the leases or any unit of which a lease is a part, (b)
any overriding royalty interest therein, or (c) any royalty interest
therein.
"New Debt" has the meaning set forth in Section 8.07.
"Notice of Title Defects" has the meaning set forth in Section 11.03.
"OGCA" means the Oklahoma General Corporation Act.
"Oil and Gas Interest(s)" means, as to a party hereto, (a) all interests
in and rights with respect to oil, gas, mineral and related properties and
assets of any kind and nature, direct or indirect, including working,
royalty and overriding royalty interests, production payments, operating
rights, net profits interests, fee minerals, fee royalties, other
non-working interests and non-operating interests; (b) interests in and
rights with respect to Hydrocarbons and other minerals or revenues therefrom
and contracts in connection therewith and claims and rights thereto
(including oil and gas leases, operating agreements, unitization and pooling
agreements and orders, division orders, transfer orders, mineral deeds,
royalty deeds, oil and gas sales, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface interests, fee
interests, reversionary interests, reservations and concessions; (c)
easements, rights of way, licenses, permits, leases, and other interests
associated with, appurtenant to, or necessary for the operation of any of
the foregoing; (d) interests in equipment and machinery (including well
equipment and machinery), oil and gas production, gathering, transmission,
compression, treating, processing and storage facilities (including tanks,
tank batteries, pipelines and gathering systems), pumps, water plants,
electric plants, gasoline and gas processing plants, refineries and other
tangible personal property and fixtures associated with, appurtenant to, or
necessary for the operation of any of the foregoing; and (e) subject to the
provisions of Sections 2.04 and 3.03, all rights to geological or
geophysical data or information (including rights under seismic, geophysical
exploration, data license or similar agreements) related to the oil, gas,
mineral or other properties which the party owns or to which the party has
any rights, including any processing, reprocessing and third party
interpretation of such data.
"Operating Costs" means all third party, out-of-pocket costs incurred
for or in connection with (a) in the case of the Group B Aspect Assets, the
acquisition of Oil and Gas Interests, (b) the acquisition of oil and gas
leases within the Prospect Areas after the date hereof, but only with the
written consent of the parties hereto, and (c) in the case of all
properties, the maintenance, development and/or operation of Oil and Gas
Interests, including geological and geophysical costs, land and associated
costs, legal, and tangible and intangible drilling costs.
"Option Contract" means an executed document by which the owner of such
document has the legal right to lease minerals in the future on pre-agreed
terms.
"Permitted Encumbrances" means (a) Liens securing indebtedness that is
described in the Disclosure Schedule of such party; (b) Liens for Taxes
which are not yet delinquent or which are being contested in good faith and
for which adequate reserves have been established as may be required by
GAAP; (c) Liens under operating agreements, unitization agreements, pooling
orders and mechanic's and materialman's liens incurred in the ordinary
course of business relating to the party's Oil and Gas Interests, which
obligations are not yet due and pursuant to which the party is not in
default; provided, the effect thereof on such Oil and Gas Interest of such
party has been properly reflected on the Property Schedule in the Net
Revenue Interest and Working Interest attributable to such Oil and Gas
Interest; (d) all rights to consent by, required notices to, filings with,
or other actions of Governmental Authorities to the extent customarily
obtained subsequent to closing; (e) other Liens described in the Disclosure
Schedule of such party; (f) preferential rights to purchase described in the
Property Schedule of such party; (g) consent to transfer requirements of any
person other than a party hereto or any Governmental Authority which
consents to transfer will be obtained on or before the Closing
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Date; and (h) Liens in the ordinary course of business consisting of minor
defects and minor irregularities in title and other minor restrictions
(whether created by or arising out of operating agreements, farm-out
agreements, leases and assignments, contracts for purchases of Hydrocarbons
or similar agreements, or otherwise in the ordinary course of business) that
are of a nature customarily accepted by prudent purchasers of oil and gas
properties and that do not materially impair the ability of the obligor to
use any such property in its operations and provided that the effect thereof
on the Oil and Gas Interest of such party has been properly reflected on the
Property Schedule for such party. For purposes of clause (h) of the
preceding sentence, a title defect or irregularity or other restriction
shall be considered minor if such items in the aggregate do not impair the
value of the affected property by more than $10,000.
"Post Effective Date Costs" shall mean net Operating Costs (i.e., net of
any resulting revenues) incurred by or for the account of (a) Esenjay on the
Oil and Gas Interests included in the Esenjay Assets and attributable to the
period of time after the Effective Date and prior to the Closing Date and
(b) Aspect on the Oil and Gas Interests included in the Group A Aspect
Assets and attributable to the period of time after the Effective Date and
prior to the Closing Date. The term "Post Effective Date Costs" shall not
include any costs related to the Houston Endowment No. 1 well (which well
has been plugged and abandoned) and the Scott Hall No. 1 well (which well
has been temporarily abandoned).
"Property Schedule" means (a) in the case of Frontier, Schedule 4.17,
(b) in the case of Esenjay, Schedule 2.01 and (c) in the case of Aspect,
Schedule 3.01.
"Prospect Areas" means those properties or prospects identified in
the Property Schedules of Aspect and/or Esenjay and the areas of mutual
interest described in the maps attached hereto as Exhibit "L".
"Proxy Statement/Prospectus" shall mean (a) the proxy statement of
Frontier to be included in the Registration Statement for the purpose of
obtaining the approval of Frontier's stockholders of this Agreement and
the Exchange, and (b) the prospectus of Frontier to be included in the
Registration Statement registering the shares of Frontier Common Stock to
be issued to Aspect and Esenjay upon consummation of the Exchange.
"Public Equity Transaction" has the meaning set forth in Section
8.08.
"Registration Statement" shall mean the registration statement on
Form S-4 to be filed by Frontier with the SEC for the purpose, among
other things, of registering the Frontier Common Stock which will be
issued to Aspect and Esenjay upon consummation of the Exchange.
"Rejection Notice" has the meaning set forth in Section 12.04.
"Related Documents" means the other instruments and agreements to be
delivered by the parties at the Closing.
"Responsible Officers" means the chief executive officer, president
and any vice president of such corporation and, with respect to any
limited liability company, such officers of the manager of such company.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 4.04.
"SEC Reports" has the meaning set forth in Section 4.04.
"Securities Act" means the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
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"Subsidiary" of a corporation or other entity means a corporation,
partnership or other business entity, the voting securities of which are
owned or otherwise controlled directly or indirectly by such corporation
or other person in an amount sufficient to elect at least a majority of
the board of directors or other managers of such corporation, partnership
or other entity.
"Superior Proposal" has the meaning set forth in Section 8.05.
"Tax" means any federal, state, or local gross receipts, license,
payroll, employment, excise, severance, income, franchise, property,
transfer, valued added, ad valorem, sales and use or other tax of any
kind, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any
schedule or attachment thereto.
"Title Defect" means any encumbrance, encroachment, irregularity,
defect in or objection to real property title to the Oil and Gas
Interests, excluding Permitted Encumbrances, that alone or in combination
with other defects renders title to a particular Oil and Gas Interest
less than Defensible Title.
"Title Defect Value" has the meaning set forth in Section 11.03.
"Undisclosed Liabilities" has the meaning set forth in Section 4.04.
"Working Interest" means an interest in a well, lease or unit which
entitles the owner thereof, at its own expense, to explore for, produce
and sell oil, gas and other minerals from the lands covered thereby
subject to the payment of all costs associated with the interest owned
and the payment of the landowner's royalty and any overriding royalty,
production payment or other similar burden to which the well, lease or
unit has been made subject.
1.02 REFERENCES AND TITLES. All references in this Agreement to Exhibits,
Schedules, Articles, Sections, subsections and other subdivisions refer to the
corresponding Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions of or to this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections or other
subdivisions of this Agreement are for convenience only, do not constitute any
part of this Agreement, and shall be disregarded in construing the language
hereof. The words "this agreement," "herein," "hereby," "hereunder" and
"hereof," and words of similar import, refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited. The words "this
article," "this section" and "this subsection," and words of similar import,
refer only to the Article, Section or Subsection hereof in which such words
occur. The word "or" is not exclusive, and the word "including" (in its various
forms) means "including without limitation." Pronouns in masculine, feminine or
neuter genders shall be construed to state and include any other gender, and
words, terms and titles (including terms defined herein) in the singular form
shall be construed to include the plural and vice versa, unless the context
otherwise requires.
1.03 KNOWLEDGE. As used in the representations and warranties contained in
this Agreement, the phrase "to the knowledge" or "to the best knowledge" of the
representing party shall mean that the Responsible Officers of such representing
party, individually or collectively, either (a) know that the matter being
represented and warranted is true and accurate or (b) have no reason, after
reasonable inquiry of persons who are likely to have information about the
matter to which the representation or warranty relates, to believe that the
matter being represented and warranted is not true and accurate.
1.04 ADEQUACY OF DISCLOSURE; CONSTRUCTION. In preparing the Disclosure
Schedules to this Agreement, the parties will use their reasonable best efforts
to identify the section or subsection, as the case may be, of this Agreement to
which an exception relates. Nothing in the Disclosure Schedules hereto shall be
deemed adequate to disclose an exception to a representation or warranty made
herein unless the Disclosure Schedule identifies the exception in adequate
detail for a reasonably prudent person to be able to identify that portion of
the representation or warranty to which the exception relates; the mere listing
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(or inclusion of a copy) of a document or other item shall not be deemed
adequate to disclose, an exception to a representation or warranty made herein
(unless the representation or warranty has to do with the existence of the
document or other items itself). The parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
1.05 SUPPLEMENTAL PROPERTY SCHEDULES. In the case of those Oil and Gas
Interests included within the Esenjay Assets or the Aspect Assets, the parties
acknowledge and agree that the all of the agreements, rights and interests
related to the Oil and Gas Interests included within the Esenjay Assets or the
Aspect Assets, proportionately reduced for the percentage interests identified
in the Property Schedules, are being conveyed hereunder (subject to the
provisions of Sections 2.04 and 3.03) and that, if necessary to accurately
reflect the interests being conveyed, the Property Schedules of Aspect and/or
Esenjay will be amended accordingly. If any party amends its Property Schedule
prior to the Closing Date and the effect of such amendment is to decrease the
Oil and Gas Interests being conveyed to Frontier hereunder, such amendment shall
be treated as a Title Defect, which shall be cured in accordance with the
provisions of Section 11.04(a)(ii) (without regard to the notice requirements of
Section 11.03 or the Defect Limit specified in Section 11.04).
ARTICLE II
ACQUISITION OF ESENJAY ASSETS
2.01 CONTRIBUTION OF ESENJAY ASSETS.
(a) Subject to the terms and conditions of this Agreement, Esenjay shall
assign, transfer, convey, contribute to the capital of, and deliver to,
Frontier, and Frontier shall acquire and receive from Esenjay, at the
Closing, all right, title and interest of Esenjay in and to the Esenjay
Assets. The Esenjay Assets shall be free and clear of all liabilities,
obligations, or Liens whatsoever, except for (a) Permitted Encumbrances, and
(b) liabilities assumed by Frontier pursuant to Section 2.02 hereof. In
exchange for the Esenjay Assets, Frontier shall issue and deliver to Esenjay
30,991,563 shares of Frontier Common Stock.
(b) The parties acknowledge and agree that the Identified Esenjay Assets
shall be contributed by Esenjay and acquired by Frontier on terms and
conditions identical to those set forth in the Aspect Participation
Agreement; provided however, that (i) the effective date shall be as set out
in this Agreement, (ii) Frontier shall not be obligated for Esenjay's
Carried Interest (as such term is defined in the Aspect Participation
Agreement), (iii) there shall be no security interest retained by Esenjay in
the Esenjay Assets, (iv) the Expense Date (as such term is defined in the
Aspect Participation Agreement) shall be the Effective Date, and (v) there
shall be no cash consideration paid to Esenjay.
(c) In all oil, gas and mineral leases taken in a Prospect Area after
the date hereof, other than those included as an Identified Esenjay Asset,
Esenjay shall be entitled to an overriding royalty interest as set out in
Schedule 2.01.
2.02 ASSUMED LIABILITIES.
(a) DEBT ASSUMPTION. The Esenjay Assets shall be subject to
liabilities, other than liabilities for Post Effective Date Costs, in the
amount of $1,000,000 and Frontier agrees to assume and discharge such debt.
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(b) ASPECT DEBT. In addition to any other amounts assumed hereby, the
parties acknowledge and agree that Esenjay has an outstanding liability to
Aspect in the principal amount of $564,337.50 and that the Esenjay Assets
shall be contributed subject to such liability.(1)
(c) CERTAIN COSTS. All Post Effective Date Costs relating to the
Esenjay Assets and paid by Esenjay on or before the Closing Date shall be
invoiced by Esenjay to Frontier within sixty (60) days of the Closing Date
and, subject to Esenjay's adequate verification of such costs at Frontier's
request, shall be paid by Frontier to Esenjay not later than (i) one hundred
eighty (180) days from the Closing Date, or (ii) ten days from Frontier's
receipt of funds from the Public Equity Transaction, whichever is earlier.
All Post Effective Date Costs relating to the Esenjay Assets that are not
paid by Esenjay on or before the Closing Date shall be assumed by Frontier
and Frontier agrees to timely discharge Esenjay's obligations with respect
to such costs. After the date hereof, Esenjay shall provide Aspect and
Frontier with monthly reports as to the Post Effective Date Costs accrued
and/or paid with respect to the Esenjay Assets.
(d) ASSUMED AGREEMENTS. As of the Closing Date, Frontier shall assume
and agrees to discharge the obligations of Esenjay under the office lease,
equipment leases and other agreements set forth on Schedule 2.02 (the
"Assumed Agreements")(2); provided, however, that Frontier is not hereby
assuming (i) any obligations arising under the Assumed Agreements on or
before the Closing Date, or (ii) any liability arising out of a violation,
breach or default (including any event which with notice or lapse of time or
both will give rise to a default) by Esenjay prior to the Closing Date under
any Assumed Agreement. There shall be prorated between Esenjay and Frontier
as of the Closing Date all accrued rent, royalties and other payments due
under the Assumed Agreements.
(e) ACCRUED VACATION AND SICK LEAVE. As of the Closing Date, Frontier
shall assume the accrued vacation and sick leave obligations of Esenjay for
those employees of Esenjay who accept employment with Frontier; provided,
however that Frontier's maximum liability under this Section 2.02(e) shall
not exceed $102,043.62, in the aggregate.
(f) OTHER. All liabilities and obligations arising under or related to
the Esenjay Assets and attributable to the period of time after the Closing
Date.
(g) ESENJAY EMPLOYEES. In conjunction with the acquisition by Frontier
of the Esenjay Assets it is agreed by the parties hereto that Frontier
shall, concurrent with Closing, offer employment to each of the current
Esenjay employees. The Esenjay employees who accept employment with Frontier
shall be compensated on terms determined by the Board of Directors of
Frontier; it being intended, without creating any rights in favor of such
employees, that such compensation terms will be comparable to those of
similarly situated employees for similarly situated companies and that, for
purposes of any benefit plans maintained by Frontier and to the extent
permitted by such plans, the Esenjay employees employed by Frontier shall be
credited with their years of service to Esenjay.
2.04 NON-ASSIGNABLE RIGHTS. Notwithstanding that the definition of Esenjay
Assets includes Esenjay's rights to the geological and geophysical data and
information attributable to the Oil and Gas
(1) The offset to this liability is Aspect's agreement to pay certain
intangible drilling and development costs, which costs will benefit certain of
the Oil and Gas Interests included in the Esenjay Assets. Esenjay will
contribute its rights under its agreement with Aspect to Frontier, limited to
the amount of the liability assumed and paid under this Section 2.02(b) (I.E.,
Esenjay will retain the excess), but with a minimum amount equal to the debt
being guaranteed (I.E., if the amount Frontier receives from Aspect under
Esenjay's agreement with Aspect is less than the debt assumed by Frontier,
Esenjay will pay Frontier the difference). The agreement will be identified on
an Exhibit to Schedule 2.01 and will be treated as an Esenjay Asset for purposes
of this Agreement.
(1) The Assumed Leases and Esenjay's rights in the underlying equipment or
office space should be included on an Exhibit to Schedule 2.01 and will be
considered an Esenjay Asset for purposes of this Agreement.
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Interests identified on Esenjay's Property Schedule (including those seismic
agreements identified on Schedule 2.04), the parties hereto acknowledge and
understand that some or all of Esenjay's rights to such data or information may
not be assignable by Esenjay. To the extent that any rights to geological or
geophysical data to be assigned to Frontier by Esenjay hereunder are not
assignable without the consent of another party or the payment of any amounts to
such party, this Agreement shall not constitute an assignment or an attempted
assignment of such data. Esenjay agrees to use its commercially reasonable best
efforts to obtain the consent of each party whose consent is required for the
transfer of the data in consideration for such assignment; provided, however,
that Esenjay shall not be required to pay any amounts to the assigning party;
and provided, further that it shall not be a breach of this Agreement if such
consent is not obtained. If such consent is not obtained at or prior to the
Closing Date, Esenjay agrees (a) to cooperate with Frontier in seeking such
consent after the Closing Date, provided that Esenjay shall not be required to
pay any amounts to the assigning party in consideration for such assignment and
(b) to the extent legally possible and without breaching Esenjay's obligations
under any agreement relating to such data, enter into any reasonable arrangement
designed to provide Fronter with the benefits of such data.
ARTICLE III
ACQUISITION OF ASPECT ASSETS
3.01 CONTRIBUTION OF ASPECT ASSETS. Subject to the terms and conditions of
this Agreement, Aspect shall assign, transfer, convey, contribute to the capital
of, and deliver to, Frontier, and Frontier shall acquire and receive from
Aspect, at the Closing, all right, title and interest of Aspect in and to the
Aspect Assets. The Aspect Assets shall be free and clear of all liabilities,
obligations, liens and encumbrances whatsoever, except for (a) Permitted
Encumbrances, and (b) liabilities assumed by Frontier pursuant to Section 3.02
hereof. In exchange for the Aspect Assets, Frontier shall issue and deliver to
Aspect 29,648,636 shares of Frontier Common Stock, subject to adjustment
pursuant to Sections 3.02(a) and 3.02(f) hereof, if applicable.
3.02 ASSUMED LIABILITIES; PERMITTED ASSET SALES; ADJUSTMENTS.
(a) ASSUMED DEBT. The parties acknowledge and agree that, as of the
date hereof, the Aspect Assets are pledged to Joint Energy Development
Investments Limited Partnership ("JEDI") as collateral for a loan by JEDI to
Aspect. At the option of Aspect and subject to the mutual agreement of the
parties hereto, the Aspect Assets may be contributed to Frontier subject to
a liability to JEDI in the amount of $3.8 million and, in such event,
Frontier shall assume such debt to JEDI and agrees to discharge the
liability associated therewith. In the event that the Aspect Assets are
contributed to Frontier subject to the debt to JEDI, the number of shares of
Frontier Common Stock to be delivered to Aspect pursuant to Section 3.01
hereof shall be reduced by 4,050,000 shares.
(b) SALE OF ASPECT ASSETS. With the prior written consent of the
parties hereto, Aspect shall be permitted to sell certain of the Aspect
Assets prior to the Closing Date. At the Closing, Aspect shall contribute
and pay over to Frontier (i) the net proceeds from any such sale of the
Aspect Assets, LESS (ii) in an amount not to exceed the amount pursuant to
clause (i), the Post Effective Date Costs relating to the Group A Aspect
Assets which are incurred and paid after the Effective Date, and LESS (iii)
in an amount not to exceed the amount pursuant to clause (i) reduced by the
amount applied pursuant to clause (c), the Operating Costs attributable to
the Group B Aspect Assets that have been paid by Aspect as of the Closing
Date and that exceed the Agreed Group B Amount.
(c) GROUP A COSTS. All Post Effective Date Costs relating to the Group
A Aspect Assets and incurred and paid after the Effective Date (reduced by
any amounts applied pursuant to Section 3.02(b)(ii)) shall be invoiced by
Aspect to Frontier within sixty (60) days of the Closing Date and, subject
to Aspect's adequate verification of such costs at the request of Frontier,
shall be paid by Frontier to Aspect not later than (i) one hundred eighty
(180) days from the Closing Date, or (ii) ten
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days from Frontier's receipt of funds from the Public Equity Transaction,
whichever is earlier. All Post Effective Date Costs incurred after the
Effective Date relating to the Aspect Assets that are not paid by Aspect on
or before the Closing Date shall be assumed by Frontier and Frontier agrees
to timely discharge Aspect's obligations with respect to such costs. After
the date hereof, Aspect shall provide Esenjay and Frontier with monthly
reports as to the Post Effective Date Costs accrued and/or paid with respect
to the Group A Asset Assets.
(d) GROUP B COSTS. The parties acknowledge and agree that, in
determining the value of the Group B Aspect Assets, such value assumes that
Aspect has or will pay Operating Costs with respect to such Group B Aspect
Assets of $5,989,000 (the "Agreed Group B Amount"). If, as of the Closing
Date, Aspect has not paid Operating Costs with respect to the Group B Aspect
Assets equal in amount to the Agreed Group B Amount, Aspect shall,
notwithstanding the conveyance of the Group B Aspect Assets to Frontier,
continue to be liable for the Operating Costs with respect to the Group B
Aspect Assets until the aggregate expenditures by Aspect are equal to the
Agreed Group B Amount. If Aspect has any continuing liability hereunder,
Frontier shall submit invoices to Aspect for the Operating Costs
attributable to the Group B Aspect Assets and such invoices shall be paid by
Aspect (i) within ten days of receipt of the invoice or (ii) on or before
the relevant vendor's due date for the payment of such Operating Cost,
whichever is later. At such time as Aspect has paid Operating Costs
attributable to the Group B Aspect Assets equal to the Agreed Group B Amount
(whether before or after the Closing Date), Frontier shall be liable for all
Operating Costs with respect to the Group B Aspect Assets in excess of the
Agreed Group B Amount, regardless of when such Operating Costs were or are
incurred, and Frontier agrees to assume and timely pay such Operating Costs.
If, as of the Closing Date, Aspect has paid Operating Costs attributable to
the Group B Aspect Assets in excess of the Agreed Group B Amount, such
excess (reduced by any amounts applied pursuant to Section 3.02(b)(iii))
shall be invoiced by Aspect to Frontier within sixty (60) days of the
Closing Date and, subject to Aspect's adequate verification of such costs at
the request of Frontier, shall be paid by Frontier to Aspect not later than
(y) one hundred eighty (180) days from the Closing Date, or (z) ten days
from Frontier's receipt of funds from the Public Equity Transaction,
whichever is earlier. After the date hereof, Aspect shall provide Esenjay
and Frontier with monthly reports as to the amount of Operating Costs
attributable to the Group B Aspect Assets that exceed the Agreed Group B
Amount.
(e) OTHER. All liabilities and obligations arising under or related to
the Aspect Assets and attributable to the period of time after the Closing
Date.
(f) ADJUSTMENTS. The Aspect Employees own an overriding royalty
interest in certain of the Oil and Gas Interests included in the Aspect
Assets. On or before the Closing Date, (i) Aspect will (A) purchase such
overriding royalty interests from the Aspect Employees such that the Aspect
Assets are not encumbered by such overriding royalty interests at the time
of the conveyances contemplated hereby, or (B) elect to treat the value of
the overriding royalty interests held by the Aspect Employees as a Title
Defect, which shall be cured on or before the Closing Date in accordance
with the provisions of Section 11.04(a)(ii) (without regard to the notice
requirements of Section 11.03 of the Defect Limit specified in Section
11.04), or (ii) on the Closing Date, the Aspect Employees will contribute
their overriding royalty interests to Frontier in exchange for Frontier
Common Stock, which contributions will be on terms and conditions mutually
acceptable to Frontier, Aspect and the Aspect Employees and any shares
issued to the Aspect Employees will reduce the number of shares issuable to
Aspect under Section 3.01.
3.03 NON-ASSIGNABLE RIGHTS. Notwithstanding that the definition of Aspect
Assets includes Aspect's rights to the geological and geophysical data and
information attributable to the Oil and Gas Interests identified on Aspect's
Property Schedule, the parties hereto acknowledge and understand that some or
all of Aspect's rights to such data or information may not be assignable by
Aspect. To the extent that any rights to geological or geophysical data to be
assigned to Frontier by Aspect hereunder are not assignable without the consent
of another party or the payment of any amounts to such party, this Agreement
shall
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not constitute an assignment or an attempted assignment of such data. Aspect
agrees to use its commercially reasonable best efforts to obtain the consent of
each party whose consent is required for the transfer of the data; provided,
however, that Aspect shall not be required to pay any amounts to the assigning
party in consideration for such assignment; and provided, further that it shall
not be a breach of this Agreement if such consent is not obtained. If such
consent is not obtained at or prior to the Closing Date, Aspect agrees (a) to
cooperate with Frontier in seeking such consent after the Closing Date, provided
that Aspect shall not be required to pay any amounts to the assigning party in
consideration for such assignment and (b) to the extent legally possible and
without breaching Aspect's obligations under any agreement relating to such
data, to enter into any reasonable arrangement designed to provide Fronter with
the benefits of such data.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO FRONTIER
As a material part of the consideration for this Agreement, Frontier
represents and warrants to each of Aspect and Esenjay as of the date of this
Agreement and as of the Closing Date as follows:
4.01 ORGANIZATION, STANDING AND QUALIFICATION. Frontier is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Oklahoma. Frontier has all requisite corporate power and authority to
carry on its business as now being conducted and to own, lease or operate its
properties as and in the places where such business is now conducted and such
properties are now owned, leased or operated. Frontier is qualified and in good
standing to do business in all states in which the Esenjay Assets and the Aspect
Assets are located and in which the nature of its business requires it to be
qualified.
4.02 EXECUTION, DELIVERY AND PERFORMANCE OF AGREEMENT; AUTHORITY. Frontier
has full corporate power and authority to enter into this Agreement and the
Related Documents to which it is a party, to perform its obligations hereunder
and thereunder and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by Frontier of this Agreement
and the Related Documents to which it is a party have been duly and validly
approved by all necessary corporate action and no other actions or proceeding on
the part of Frontier are necessary to authorize this Agreement and the Related
Documents to which it is a party and the transactions contemplated hereby and
thereby; provided, however, that, solely for purposes of the making of this
representation as of the date of this Agreement (and not as of the Closing
Date), the requisite approval of this Agreement and the transactions
contemplated hereby by Frontier's shareholders has not been obtained by
Frontier. Except for (a) the filing of the Proxy Statement/Prospectus included
in the Registration Statement with the SEC and the declaration of effectiveness
thereof by the SEC and the filing of other SEC required documents and compliance
with the Securities Act and the Exchange Act and state securities or blue sky
laws, (b) the filing of an amendment to Frontier's listing application with the
NASDAQ, and (c) the consent of Bank of America Illinois (which consent will be
obtained prior to the Closing Date), no consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice to,
any Governmental Authority or any other entity or person is required to be made,
obtained, or given by Frontier in connection with the execution, delivery and
performance of this Agreement and the Related Documents to which it is a party.
This Agreement constitutes, and the Related Documents to which it is a party
when executed will constitute, legal, valid and binding obligations of Frontier,
enforceable against Frontier in accordance with their respective terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the enforcement
of creditors' rights generally and by equitable limitations on the availability
of specific remedies.
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4.03 CONFLICTS. The execution, delivery and performance by Frontier of
this Agreement and the Related Documents to which it is a party do not and will
not, with or without the giving of notice or the passage of time, or both,
violate or result in a breach of, conflict with, default, right to accelerate or
loss of rights under, or result in the creation of any Lien pursuant to, any
provision of Frontier's organizational documents or bylaws, or, except as set
forth on Disclosure Schedule-Frontier, any mortgage, deed of trust, lease,
license, agreement, or understanding, to which Frontier is a party or any of
Frontier's assets is subject, or any order, judgment or decree to which Frontier
is a party or by which Frontier or its assets may be bound or affected, or to
Frontier's knowledge, any law ordinance, rule or regulation to which Frontier or
its assets is subject.
4.04 SEC DOCUMENTS; FINANCIAL STATEMENTS; LIABILITIES.
(a) Frontier has made available to Esenjay and Aspect true and complete
copies of its Annual Report on Form 10-KSB for the year ended December 31,
1996 and its Quarterly Reports on Form 10-QSB for each of the quarterly
periods ended March 31, 1997, June 30, 1997 and September 30, 1997
(collectively, the "SEC Reports"), each in the form (including exhibits and
any amendments thereto) required to be filed with the SEC. Since January 1,
1995, Frontier has timely filed (or has cured any failures to timely file to
the satisfaction of the SEC staff) all reports, schedules, forms, statements
and other documents (excluding any prospectus or registration statement
filed by Frontier) required to be filed with the SEC (the "SEC Documents").
As of their respective dates, each of the SEC Documents (i) complied in all
material respects with all applicable requirements of the Exchange Act, and
the rules and regulations promulgated thereunder, respectively, and (ii) did
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, each prospectus and each registration statement filed by
Frontier with the SEC (y) complied in all material respects with all
applicable requirements of the Securities Act, and the rules and regulations
promulgated thereunder, respectively, and (z) did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
(b) The Frontier audited financial statements included in the SEC
Documents (the "Frontier Financial Statements") have been audited by
Deloitte & Touche LLP, independent accountants, or the independent
accounting firm specified therein, in accordance with generally accepted
auditing standards, have been prepared in accordance with GAAP applied on a
basis consistent with prior periods except as required by changes in GAAP,
and present fairly the financial position of Frontier at such dates and the
results of operations and cash flows for the periods then ended. The
Frontier interim financial statements included in the SEC Reports (the
"Frontier Interim Financial Statements") fairly present the financial
position of Frontier as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended,
except that (i) the notes to the financial statements included therein are
in summary form and therefore not complete and (ii) such financial
statements are subject to normal year-end non-cash adjustments. Except as
set forth in the Disclosure Schedule-Frontier, neither Frontier nor any of
its assets is subject to any liability, commitment, debt or obligation (of
any kind whatsoever whether absolute or contingent, accrued, fixed, known,
unknown, matured or unmatured) ("Undisclosed Liabilities"), except (A) as
and to the extent reflected on the most recent Frontier Financial Statements
and Frontier Interim Financial Statements, or (B) as reflected in the SEC
Reports, or (C) as may have been incurred or may have arisen since the date
of the most recent Frontier Interim Financial Statements in the ordinary
course of business and that are not reasonably likely to have a Material
Adverse Effect on Frontier.
(c) The most recent Frontier Financial Statements include appropriate
reserves for all Taxes and other liabilities incurred as of such date but
not yet payable.
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(d) Except as set forth in the Disclosure Schedule-Frontier, since the
date of the most recent Frontier Financial Statements, no event or condition
(financial or otherwise) has occurred that has had or is likely to have a
Material Adverse Effect on Frontier.
(e) Except as set forth in the Disclosure Schedule-Frontier, the
statements of income included in the most recent Frontier Interim Financial
Statements do not contain any income or revenue realized from operations
that Frontier would be prohibited or restricted from conducting after the
Closing Date pursuant to any covenant or provision in any contract to which
Frontier is a party.
4.05 CAPITALIZATION.
(a) Frontier. The authorized capital stock of Frontier Natural Gas
Corporation consists of 40,000,000 shares of Frontier Common Stock, of which
9,890,906 shares are issued and outstanding as of the date hereof, and
5,000,000 shares of preferred stock, $.01 par value per share ("Frontier
Preferred Stock"), of which 85,961 shares of preferred stock are issued and
outstanding as of the date hereof. Other than the option and/or warrant
agreements identified on Schedule 4.05(a) attached hereto (which Schedule
includes the number of options or warrants outstanding under such agreements
and the strike price for each such option or warrant), there are no
outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of
any character or nature whatsoever under which Frontier may become obligated
to issue, assign, transfer or repurchase any shares of the capital stock or
other equity interest in Frontier. Except as set forth on Schedule 4.05(a),
the Exchange will not cause or require any adjustments under the option
and/or warrant agreements identified on Schedule 4.05(a). All of the
outstanding shares of Frontier Common Stock and Frontier Preferred Stock
have been validly issued and are fully paid and nonassessable and were
issued in full compliance with all applicable securities laws. The shares of
Frontier Common Stock issuable to Esenjay and Aspect hereunder, when issued
in accordance with the provisions of this Agreement, will be duly and
validly authorized and issued and will be fully paid and nonassessable free
and clear of any preemptive right of any security holder of Frontier.
(b) Other Entities. Except for the Subsidiaries of Frontier identified
on Schedule 4.05(b) (all of which Subsidiaries are wholly-owned, directly or
indirectly, by Frontier Natural Gas Corporation), Frontier has no interest,
direct or indirect, and has no commitment to purchase any interest, direct
or indirect, in any other corporation or in any partnership or other
business entity.
4.06 ACCOUNTS RECEIVABLE, PAYABLE. All of the accounts receivable and
accounts payable reflected on the most recent Frontier Financial Statements or
arising thereafter as reflected on the books of Frontier have arisen only from
bona fide transactions in the ordinary course of business, represent valid
obligations owing to or from, as the case may be, Frontier and have been accrued
and recorded in accordance with GAAP. Schedule 4.06 sets forth as of October 31,
1997, the accounts receivable and accounts payable balances of Frontier,
together with an aging schedule of such balances as of such date.
4.07 ABSENCE OF EVENTS. Since September 30, 1997, Frontier has not, except
as set forth on Schedule 4.07 or pursuant to this Agreement, done any of the
following:
(a) mortgaged, pledged or subjected its properties or assets to any Lien
other than a Permitted Encumbrance;
(b) purchased, sold, leased, transferred or otherwise disposed of (i)
any Oil and Gas Interests that, individually or in the aggregate, had a fair
market value of $50,000 or more; or (ii) any other assets except in the
ordinary course of business and consistent with prior practice;
(c) other than in the ordinary course of business and consistent with
prior practice, made any change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable, or paid or agreed or
orally promised to pay, conditionally or otherwise, any bonus, extra
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compensation, reimbursement, pension or severance or vacation pay, to any
shareholder, partner, director, officer, employee or agent;
(d) issued or sold any shares of capital stock or other securities, or
issued, granted or sold any options, rights or warrants with respect
thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders (other than note
payments made in accordance with the underlying loan or credit agreements
and consistent with past practices), made any loans or advances or
guaranteed any loans or advances to any person, or otherwise incurred or
suffered to exist any liabilities or obligations of any nature (other than
current liabilities incurred in the ordinary course of business and
consistent with past practices);
(f) canceled, waived or released any rights or claims against, or
indebtedness owed by, third parties;
(g) amended its certificate or articles of incorporation, by-laws, or
similar documents;
(h) entered into any transaction, contract or commitment other than in
the ordinary course of business and consistent with prior practice;
(i) made any capital expenditure or commitment therefor, except in the
ordinary course of business;
(j) adopted any employee benefit plan or made any change in any existing
employee benefit plans or made any bonus or profit sharing distribution or
granted any stock options;
(k) increased indebtedness for borrowed money, or made any loan to any
person, other than in the ordinary course of business;
(l) made any change affecting any banking, safe deposit or power of
attorney arrangements;
(m) made any change in any accounting principle or practice or method or
application thereof;
(n) suffered the termination, suspension or revocation of any license or
permit necessary for the operation of its business;
(o) entered into any transaction other than on an arm's length basis;
(p) received any notice of default or termination of any contract, lease
or other agreement or suffered any damage, destruction, loss (whether or not
covered by insurance) or any other changes, event or condition which in any
case or in the aggregate, has had or may have a Material Adverse Effect on
Frontier;
(q) instituted, settled or agreed to settle any litigation, action or
proceeding before any court or governmental body;
(r) entered into any swap, hedging or similar arrangements, forward sale
of production or production sales contract; or
(s) entered into any agreement, whether or not in writing, or made any
commitment to take any of the types of actions described in paragraphs (a)
through (r) above.
4.08 CONTRACTS. The Disclosure Schedule-Frontier lists each of the
following instruments, documents or agreements to which Frontier is a party and
that is currently in effect or under which Frontier has any obligations: (a)
collective bargaining agreement; (b) employment or other agreement or contract
with or commitment to any salaried employee, except for unwritten agreements or
agreements or arrangements terminable at will or upon statutorily required
notice; (c) agreement, contract or commitment containing any covenant (other
than covenants entered into in the ordinary course of business relating to the
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confidential or proprietary information of another person) limiting Frontier's
freedom to engage in any line of business or to compete with any person; (d)
obligation of guaranty or indemnification arising from any agreement, contract
or commitment, except as provided in its certificate of incorporation; (e) joint
venture, partnership, franchise or similar contract involving a sharing of
profits or expenses, other than agreements relating to Frontier's Oil and Gas
Interests (which have been made available to Aspect and Esenjay); (f) non
disclosure agreement, non competition agreement, non solicitation agreement, any
agreement with an officer, director or employee of Frontier, tax indemnity, tax
sharing or tax allocation agreement or severance, bonus or commission agreement;
(g) agreement or contract under which Frontier is the licensee of computer
software or other intellectual property with a per unit cost greater than
$10,000; (h) contract between Frontier and any of its affiliates, other than
those referred to in the SEC Reports; (i) indenture, mortgage, loan, credit,
sale leaseback or similar contract under which Frontier has borrowed in excess
of $25,000 or issued any note, bond or other evidence of indebtedness for
borrowed money or guaranteed indebtedness for money borrowed by others in excess
of $25,000; (j) hedge, swap, exchange, futures or similar agreements or
contracts in an amount in excess of $25,000; (k) any Registration Rights
Agreements or other agreements under which Frontier has any obligations to
register shares of Frontier Common Stock; or (l) other agreement, contract or
commitment that has had or may have a Material Adverse Effect on Frontier.
Frontier is not a party to any oral agreements of any nature, other than those
terminable at will without penalty or default and the termination of which would
not have a Material Adverse Effect on Frontier. There is no existing breach by
Frontier of, nor is there any pending or, to the knowledge of Frontier,
threatened claim that Frontier has breached any of the terms or conditions of
any of its material agreements, contracts or commitments and, to the knowledge
of Frontier, no other parties to such agreements, contracts or commitments have
breached any of their terms or conditions.
4.09 TAXES. Except as set forth in the Disclosure Schedule-Frontier, each
of the following is true with respect to Frontier Natural Gas Corporation and
each subsidiary of Frontier Natural Gas Corporation with which Frontier Natural
Gas Corporation files consolidated or combined federal or state income tax
returns, in each case as listed on Schedule 4.05(b) attached hereto
(collectively the "Frontier Group"):
(a) all Tax Returns required to be filed by each member of the Frontier
Group have been filed when due, including legal periods permitted by
extensions, in accordance with all applicable laws; all material Taxes shown
on such Tax Returns have been timely paid when due; the Tax Returns have
been properly completed in compliance in all material respects with all
applicable laws and regulations and completely and accurately reflect the
facts regarding the income, expenses, properties, businesses and operations
required to be shown thereon;
(b) each member of the Frontier Group has paid all material Taxes
required to be paid by it (whether or not shown on a Tax Return) or for
which it is liable, whether to taxing authorities or to other persons under
tax allocation agreements, and the charges, accruals, and reserves for Taxes
due, or accrued but not yet due, relating to its income, properties,
transactions or operations for any periods prior to the Closing Date as
reflected on its books (including the latest Frontier Financial Statement)
are adequate in the aggregate to cover such Taxes;
(c) there are no agreements or consents currently in effect for the
extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of any member of the Frontier Group for any period ending on or
before the Closing Date and no member the Frontier Group has been requested
to enter into any such agreement or consent;
(d) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of any member of the Frontier Group;
(e) all material Taxes that the Frontier Group is required by law to
withhold or collect have been duly withheld or collected, and have been
timely paid over to the appropriate governmental authorities to the extent
due and payable;
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(f) no member of the Frontier Group is a party to any agreement,
contract, arrangement or plan that would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the
meaning of Code Section 280G;
(g) no member of the Frontier Group has agreed, nor is it required, to
make any adjustment under Code Section 481(a) (or any comparable provision
of state or local law) by reason of a change in accounting method or
otherwise;
(h) no member of the Frontier Group has filed a consent pursuant to the
collapsible corporation provisions of Code Section 341(f) (or any
corresponding provision of state, local or foreign income law) or agreed to
have Code Section 341(f)(2) (or any corresponding provision of state, local
or foreign income law) apply to any disposition of any asset owned by it;
(i) neither Frontier nor any member of the Frontier Group has been a
member of an affiliated group (used herein as defined in Code Section 1504)
other than an affiliated group of which Frontier Natural Gas Corporation is
the parent corporation; and
(j) except as set forth on the Disclosure Schedule-Frontier, neither
Frontier nor any member of the Frontier Group is (or has ever been) a party
to any tax sharing agreement nor has any such member assumed the tax
liability of any other person under contract.
4.10 LITIGATION. There is no legal, administrative, arbitration other
proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Frontier, threatened against Frontier
except as set forth on the Disclosure Schedule-Frontier.
4.11 COMPLIANCE WITH LAWS, MATERIAL AGREEMENTS AND PERMITS. Frontier is
not in violation of, or in default under, and no event has occurred that (with
notice or the lapse of time or both) would constitute a violation of or default
under, (a) its articles of incorporation or by-laws, (b) any applicable law,
rule, regulation, order, writ, decree or judgment of any Governmental Authority,
or (c) any agreement to which Frontier is a party or to which any of its assets
is subject or bound, except (in the case of clause (b) or (c) above) for any
violation or default that would not, individually or in the aggregate, have a
Material Adverse Effect on Frontier. Frontier has obtained and holds all
permits, licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the lawful conduct
of its business or the lawful ownership, use and operation of its assets
("Frontier Permits"), except for Frontier Permits which the failure to obtain or
hold would not, individually or in the aggregate, have a Material Adverse Effect
on Frontier. Frontier is in compliance with the terms of its Frontier Permits,
except where the failure to comply would not, individually or in the aggregate,
have a Material Adverse Effect on Frontier. No investigation or review by any
Governmental Authority with respect to Frontier is pending or, to the knowledge
of Frontier, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on Frontier.
4.12 TAX REPRESENTATIONS. To the knowledge of Frontier, each of the
following representations are true, correct and complete and will continue to be
true, correct and complete as of the Closing Date:
(a) no Frontier Common Stock issued pursuant to this Agreement will be
issued in satisfaction of an indebtedness of Frontier or of interest on
indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits and
Schedules hereto, the transfers of the Aspect Assets and the Esenjay Assets
to Frontier are not the result of the solicitation of a promoter, broker, or
investment house;
(c) other than as expressly set forth in this Agreement, there is no
indebtedness between Frontier and Esenjay or Frontier and Aspect, and there
will be no indebtedness of Frontier created in favor of either Esenjay or
Aspect as a result of or in connection with the Exchange.
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(d) taking into account the issuance of the Frontier Common Stock
pursuant to this Agreement and any Frontier Common Stock issued to the
Aspect Employees (as such term in defined in the Section 351 Plan of
Exchange attached hereto as Exhibit "E") and disregarding for these purposes
the Frontier Preferred Stock issued and outstanding as of the date hereof,
at or in connection with the Closing, Aspect, Esenjay and the Aspect
Employees, collectively, will own stock in Frontier possessing at least 80%
of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other classes of stock
of Frontier.
(e) Aspect and Esenjay will receive, at the Closing, Frontier Common
Stock approximately equal to the net fair market value of the assets
transferred to Frontier by Aspect and Esenjay, respectively;
(f) other than as set forth in this Agreement, each of the parties to
the Exchange will pay its or his own expenses, if any, incurred in
connection with the Exchange.
4.13 ENVIRONMENTAL MATTERS. Consistent with its status as operator or
non-operator, as the case may be,
(a) Frontier has conducted its business and operated its assets, and is
conducting its business and operating its assets, in material compliance
with all Environmental Laws;
(b) Frontier has not been notified by any Governmental Authority or
other third party that any of the operations or assets of Frontier is the
subject of any investigation or inquiry by any Governmental Authority or
other third party evaluating whether any remedial action is needed to
respond to a release or threatened release of any Hazardous Material or to
the improper treatment, storage or disposal (including treatment, storage or
disposal at offsite locations) of any Hazardous Material;
(c) Neither Frontier nor any other person has filed any notice under any
federal, state or local law indicating that (i) Frontier is responsible for
the improper release into the environment, or the improper treatment,
storage or disposal, of any Hazardous Material, or (ii) any Hazardous
Material is improperly treated, stored or disposed of upon any property of
Frontier;
(d) Frontier has no contingent liability in connection with (i) the
release or threatened release into the environment at, beneath or on any
property now or previously owned or leased by Frontier, (ii) the treatment,
storage or disposal of any Hazardous Material, or (iii) any other claims
(including common law claims) with respect to damage to health, safety or
the environment;
(e) Frontier has not received any claim, complaint, notice, inquiry or
request for information involving any matter which remains unresolved as of
the date hereof with respect to any alleged violation of any Environmental
Law or regarding potential liability under any Environmental Law or relating
to any other claims (including common law claims) with respect to damage to
health, safety or the environment relating to operations or conditions of
any facilities or property (including off-site treatment, storage or
disposal of any Hazardous Material from such facilities or property)
currently or formerly owned, leased or operated by Frontier;
(f) No property now or previously owned, leased or operated by Frontier
is listed on the National Priorities List pursuant to CERCLA or on the
CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
(g) Frontier is not directly transporting, has not directly transported,
is not directly arranging for the transportation of, and has not directly
arranged for the transportation of, any Hazardous Material to any location
which is listed on the National Priorities List pursuant to CERCLA, on the
CERCLIS, or on any similar federal or state list or which is the subject of
federal, state or local enforcement actions or other investigations that may
lead to material claims against such company for response costs, damage to
natural resources or personal injury, including claims under CERCLA;
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(h) There are no sites, locations or operations at which Frontier is
currently undertaking, or has completed, any remedial or response action
relating to any release or threatened release of Hazardous Materials, as
required by Environmental Laws or in response to a common law claim or a
potential common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid waste
disposal facilities owned or operated by Frontier are used and operated in
material compliance with Environmental Laws.
4.14 BOOKS AND RECORDS. All books, records and files of Frontier
(including those pertaining to Frontier's Oil and Gas Interests, wells and other
assets, those pertaining to the production, gathering, transportation and sale
of Hydrocarbons, and corporate, accounting, financial and employee records) (a)
have been prepared, assembled and maintained in accordance with usual and
customary policies and procedures and (b) reflect in all material respects the
ownership, use, enjoyment and operation by Frontier of its assets. True and
correct copies of all such books, records and files have been made available to
Aspect and Esenjay.
4.15 GAS IMBALANCES. Other than as set forth at Schedule 4.15 hereto,
Frontier has not received any payments under gas contracts for which any party
has a right to take make up gas from Frontier, and has not Frontier received any
payments for production which are subject to refund or recoupment out of future
production. There is no Oil and Gas Interest with respect to which Frontier and
its predecessors in title to the Oil and Gas Interest have collectively taken
more (referred to herein as "over-produced") or less (referred to herein as
"under-produced") production from such well than the ownership of Frontier and
such predecessors would entitle Frontier and such predecessors (absent any gas
balancing agreement or arrangement) to receive. There exist no gas balancing
arrangements or agreements whereby over-production from wells other than Oil and
Gas Interests can be balanced with production from the Oil and Gas Interests.
None of the Oil and Gas Interests is subject to having allowable production
after the date hereof reduced below the full and regular allowable (including
the maximum permissible tolerance) because of any over-production (whether or
not the same was permissible at the time) prior to the date hereof. A breach of
this representation and warranty shall be treated as a Title Defect (as
hereinafter defined) and an adjustment shall be made in accordance with the
provisions of clause (b) of Section 11.04.
4.16 TITLE TO ASSETS OTHER THAN OIL AND GAS INTERESTS. Except for Oil and
Gas Interests of Frontier (which are covered by Section 4.17 hereof), Frontier
has good and marketable title to, or valid leasehold interests in, all of the
properties and assets used in its business, including, but not limited to, the
computer hardware and software and the exclusive right to use in its trade areas
its name and any other trademark or servicemark currently utilized by such
entity. Except for any Permitted Encumbrance, none of such properties and assets
are subject to any Lien, easement, liability or adverse claim of any nature
whatsoever, direct or indirect, whether accrued, absolute, contingent or
otherwise. All of such properties and assets owned or leased are in good
operating condition and repair (normal wear and tear excepted).
4.17 TITLE TO OIL AND GAS INTERESTS. Schedule 4.17 contains a complete and
accurate list of Frontier's Oil and Gas Interests and sets forth (i) the Working
Interests of Frontier therein, and (ii) sufficient detail to determine the Net
Revenue Interests of Frontier therein. Except as set forth in the Disclosure
Schedule-Frontier:
(a) Frontier (individually or collectively) has Defensible Title to
Frontier's Oil and Gas Interests;
(b) the leases and related agreements forming any part of Frontier's Oil
and Gas Interests are in full force and effect and are valid and legally
binding agreements among the parties thereto, their successors and assigns,
enforceable in accordance with their terms in all material respects except
for applicable bankruptcy and insolvency laws. All rentals, royalties and
other payments due and payable under any such leases and other contracts and
agreements forming a part of Frontier's Oil and Gas
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Interests have been properly and timely paid and all other obligations under
such leases and related agreements attendant to the ownership of Frontier's
Oil and Gas Interests have been met; and
(c) there are no back-in, reversionary or similar interests (the vesting
of which is subject to future production) held by third parties which would
reduce the interests of Frontier in Frontier's Oil and Gas Interests from
that shown on the Property Schedule.
4.18 OIL AND GAS OPERATIONS. To the best knowledge of Frontier, all wells
included in the Oil and Gas Interests of Frontier have been drilled and
completed (if applicable), operated and produced in accordance with generally
accepted oil and gas field practices and in compliance in all material respects
with applicable leases and applicable laws, rules and regulations, except where
any failure or violation could not reasonably be expected to have a Material
Adverse Effect on Frontier. Proceeds from the sale of Hydrocarbons produced from
Frontier's Oil and Gas Interests are being received by Frontier in a timely
manner and are not being held in suspense for any reason (except for amounts,
individually or in the aggregate, not in excess of $25,000 and held in suspense
in the ordinary course of business). None of Frontier's Oil and Gas Interests
are subject to production curtailments, and, to the knowledge of Frontier, no
such production curtailment is pending or threatened. Schedule 4.18 sets forth a
true and correct copy of Frontier's latest independent third party report
regarding its proved developed reserves and all internal reports prepared by
Frontier since the date of such third party report.
4.19 NO GUARANTEES. Frontier has not directly or indirectly guaranteed the
obligations or liabilities of any other person, firm or corporation.
4.20 EMPLOYEE MATTERS. Frontier has provided to each of Aspect and Esenjay
a true and correct list detailing the name, current annual compensation rate
(including bonus and commissions), current base salary rate, accrued bonus,
accrued sick leave, accrued severance pay and accrued vacation benefits of each
salaried employee of Frontier. There are no charges of, formal, informal or
internal complaints of, or proceeding involving, discrimination or harassment
(including discrimination or harassment based upon sex, age, marital status,
race, religion, color, creed, national origin, sexual preference, handicap or
veteran status) pending or, to the knowledge of Frontier, threatened; nor is
there any investigation pending or, to the knowledge of Frontier, threatened,
including investigations before the Equal Employment Opportunity Commission or
any federal, state or local agency or court with respect to any current or
former employee of Frontier.
4.21 EMPLOYEE BENEFIT PLANS. With respect to any member of the Frontier
Group:
(a) The Disclosure Schedule-Frontier lists each Employee Plan that each
member of the Frontier Group maintains, administers, contributes to, or has
any contingent liability with respect thereto. Frontier has provided to
Aspect and Esenjay a true and complete copy of each such Employee Plan,
current summary plan description, (and, if applicable, related trust
documents) and all amendments thereto, together with (i) the three most
recent annual reports, if any, prepared in connection with each such
Employee Plan (Form 5500 including, if applicable, Schedule B thereto); (ii)
the most recent actuarial report, if any, and trust reports prepared in
connection with each Employee Plan; (iii) all material communications
received from or sent to the IRS or the DOL within the last two years
(including a written description of any material oral communications
relating to the IRS Voluntary Compliance Resolution or Closing Agreement
Programs); (iv) the most recent IRS determination letter with respect to
each Employee Plan and the most recent application for a determination
letter, both as applicable; (v) all insurance contracts or other funding
arrangements, currently in force; and (vi) an actuarial study of any
post-employment life or medical benefits provided, if any.
(b) The Disclosure Schedule-Frontier identifies each Benefit Arrangement
that each member of the Frontier Group maintains, administers, contributes
to, or has any contingent liability with respect thereto. Each Benefit
Arrangement has been maintained and administered in substantial compliance
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with its terms and with the requirements (including reporting requirements,
if any) prescribed by any and all statutes, orders, rules and regulations
which are applicable to such Benefit Arrangement.
(c) Benefits under any Employee Plan or Benefit Arrangement are as
represented in said documents and have not been increased or modified
(whether written or not written) subsequent to the dates of such documents.
To the knowledge of Frontier, no member of the Frontier Group has
communicated to any employee or former employee any intention or commitment
to modify any Employee Plan or Benefit Arrangement or to establish or
implement any other employee or retiree benefit or compensation arrangement.
(d) No Employee Plan is (i) a Multiemployer Plan, (ii) an Employee Plan,
other than any Multiemployer Plan, subject to Title IV of ERISA, (iii)
maintained in connection with any trust described in Section 501(c)(9) of
the Code or (iv) a plan to which Section 412 of the Code applies. No current
or former member of the Frontier Group has ever maintained or become
obligated to contribute to any employee benefit plan (i) that is subject to
Title IV of ERISA, (ii) to which Section 412 of the Code applies, or (iii)
that is a Multiemployer Plan or (iv) that is maintained in connection with
any trust described in Section 501(c)(9) of the Code. No member of the
Frontier Group has within the last five years engaged in, or is a successor
corporation to an entity that has engaged in, a transaction described in
Section 4069 of ERISA. No member of the Frontier Group is subject to
withdrawal liability (whether asserted or unasserted) under Section 4201, et
seq. of ERISA.
(e) Each Employee Plan which is intended to be qualified under Section
401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and no event has occurred since such
adoption that would adversely affect such qualification and each trust
created in connection with each such Employee Plan forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. A favorable
determination letter has been issued by the IRS as to the qualification of
each such Employee Plan for which a determination is available under the
Code and to the effect that each such trust is exempt from taxation under
Section 501(a) of the Code. Each Employee Plan has been maintained and
administered in substantial compliance with its terms and with the
requirements (including reporting requirements, if any) prescribed by any
and all applicable statutes, orders, rules and regulations, including ERISA
and the Code.
(f) Full payment has been made of all amounts which any member of the
Frontier Group is or has been required to have paid as contributions to or
benefits due under any Employee Plan or Benefit Arrangement under applicable
law or under the terms of any such plan or any arrangement.
(g) No member of the Frontier Group, or any of their respective
directors, officers or employees has engaged in any transaction with respect
to an Employee Plan that could subject Frontier to a tax, penalty or
liability for a prohibited transaction, as defined in Section 406 of ERISA
or Section 4975 of the Code. None of the assets of any Employee Plan are
invested in employer securities or employer real property.
(h) To the knowledge of Frontier, there are no facts or circumstances
that might give rise to any liability under Title I of ERISA.
(i) No member of the Frontier Group has any current or projected
liability in respect of post-retirement or post-employment welfare benefits
for retired, current or former employees, except as required to avoid excise
tax under Section 4980B of the Code, relating to COBRA.
(j) There is no litigation, administrative or arbitration proceeding or
other dispute pending or, to the knowledge of Frontier, threatened that
involves any Employee Plan or Benefit Arrangement.
(k) No employee or former employee of any member of the Frontier Group
will become entitled to any bonus, retirement, severance, job security or
similar benefit or enhanced benefit (including acceleration of an award,
vesting or exercise of an incentive award) or any fee or payment of any kind
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solely as a result of any of the transactions contemplated hereby, except as
disclosed on the Disclosure Schedule-Frontier and no such disclosed payment
constitutes a parachute payment described in Section 280G of the Code,
except as disclosed in the Disclosure Schedule-Frontier.
(l) To the knowledge of Frontier, all group health plans (as defined in
Code Section 5000(b)(1) and as defined in ERISA Section 607(i)) of any
member of the Frontier Group have at all times fully complied with all
applicable notification and continuation coverage requirements of Section
4980B(f) of the Code and Section 601 of ERISA, and the regulations
promulgated thereunder. Further, no Employee Plan provides health, medical,
death or survivor benefits to any stockholders or directors who are not
employees, former employees or beneficiaries thereof, except to the extent
otherwise required by the continuation requirements of Section 4980B(f) of
the Code and Section 601 of ERISA, and to the knowledge of Frontier there
are no claims by terminated employees with respect thereto.
(m) Except as set forth in the Disclosure Schedule-Frontier, no employee
or former employee, officer or director of any member of the Frontier Group
is or will become entitled to receive any award under any discretionary or
other bonus plans.
(n) All obligations under any Employee Plans and/or Benefit Arrangements
have been in the aggregate, accrued on the Frontier Financial Statements to
the extent required (including items relating to vesting via passage of time
or as a result of the transaction contemplated by this Agreement).
4.22 BROKER/FINDERS. Except as set forth on the Disclosure
Schedule-Frontier, no broker, finder, investment banker or other person is or
will be, in connection with the Exchange, entitled to any brokerage or
investment bankers fees, commissions or finders fees based on any arrangement
made by or on behalf of Frontier for which any party hereto will have any
liability or obligation.
4.23 ROYALTIES. To the knowledge of Frontier, all royalties, overriding
royalties, compensatory royalties and other payments due from or in respect of
production with respect to Frontier's Oil and Gas Interests, have been or will
be, prior to the Closing Date, properly and correctly paid or provided for in
all material respects, except for those for which Frontier has a valid right to
suspend. Frontier has not received any written notice of default from any party
alleging that Frontier is in default under the terms of any lease or other
agreement relating to its Oil and Gas Interests, or that any such lease or other
agreement is invalid.
4.24 PLUGGING AND ABANDONMENT LIABILITIES. To the best knowledge of
Frontier, Frontier has no obligation under any contract, statute or regulation
to plug and/or dismantle any shut-in or non-producing well.
4.25 PREPAYMENTS. No prepayment for Hydrocarbon sales has been received by
Frontier for Hydrocarbons which have not been delivered as of the date hereof.
4.26 HEDGING ACTIVITIES. Except as set forth in the Disclosure
Schedule-Frontier, Frontier does not participate in any hedging activities.
4.27 TRANSACTIONS WITH RELATED PARTIES.
(a) The SEC Documents describe all transactions required to be described
therein of the types detailed in Items 402 and 404 of Regulation S-B of the
SEC, and the Disclosure Schedule-Frontier lists all transactions between
January 1, 1993 and the date of this Agreement or with respect to activities
that pre-date January 1, 1993, which currently require payments in excess of
$10,000 by Frontier or for the benefit of Frontier, on the one hand, and any
director or officer of Frontier of any affiliate of such officer or
director, on the other hand, including, (i) any debtor or creditor
relationship, (ii) any transfer or lease of real or personal property, (iii)
wages, salaries, commissions, bonuses and agreements relating to employment
and (iv) purchases or sales of products or services.
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(b) The Disclosure Schedule-Frontier lists (i) all claims of any nature
that any officer or director of Frontier or any affiliate of such officer or
director has against Frontier as of the date of this Agreement that are not
reflected in the most recent Frontier Financial Statements and (ii) all
claims of any nature that Frontier has against any officer or director of
Frontier or any affiliate of such officer or director as of the date of this
Agreement that are not reflected in the most recent Frontier Financial
Statements.
4.28 DISCLOSURE. The representations, warranties and statements made by
Frontier in this Agreement, and in the certificates and other documents
delivered pursuant hereto, do not contain any untrue statement of a material
fact, and, when taken together, do no omit to state any material fact necessary
to make such representations, warranties and statements, in light of the
circumstances under which they are made, not misleading. Since the date of the
most recent SEC Report, there have not been any events, changes or developments
relating to Frontier that are reasonably likely to have a Material Adverse
Effect on Frontier.
ARTICLE V
FINANCIAL ADVISOR
5.01 FRONTIER HAS BEEN AND SHALL BE ADVISED IN REGARD TO THE EXCHANGE BY
GBI. A copy of its engagement of GBI is set forth at Schedule 5.01 hereto, and
Aspect and Esenjay acknowledge same as a valid obligation and contract of
Frontier, and further agree to cooperate fully with GBI in GBI's preparation of
a fairness opinion in regards to this Agreement. It is specifically acknowledged
and agreed to by Frontier, Aspect and Esenjay that the delivery of said fairness
opinion, in form and substance satisfactory to counsel of Frontier, expressing
that the terms and provisions of this Agreement are fair to the shareholders of
Frontier is a condition precedent to Closing of the Exchange.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ESENJAY
As a material part of the consideration for this Agreement, Esenjay
represents and warrants to each of Aspect and Frontier as of the date of this
Agreement and as of the Closing Date as follows:
6.01 ORGANIZATION, STANDING AND QUALIFICATION. Esenjay is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas. Esenjay has all requisite corporate power and authority to carry
on its business as now being conducted and to own, lease or operate its
properties as and in the places where such business is now conducted and such
properties are now owned, leased or operated. Esenjay is qualified and in good
standing to do business in all states in which the nature of its business
requires it to be qualified.
6.02 EXECUTION, DELIVERY AND PERFORMANCE OF AGREEMENT; AUTHORITY. Esenjay
has full corporate power and authority to enter into this Agreement and the
Related Documents to which it is a party, to perform its obligations hereunder
and thereunder and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance by Esenjay of this Agreement
and the Related Documents to which it is a party have been duly and validly
approved by all necessary corporate action and no other actions or proceeding on
the part of Esenjay are necessary to authorize this Agreement and the Related
Documents to which it is a party and the transactions contemplated hereby and
thereby. This Agreement constitutes, and the Related Documents to which it is a
party when executed will constitute, legal, valid and binding obligations of
Esenjay, enforceable against Esenjay in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors' rights generally and by equitable limitations on the
availability of specific remedies.
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6.03 CONFLICTS. The execution, delivery and performance of this Agreement
and the Related Documents to which it is a party by Esenjay do not and will not,
with or without the giving of notice or the passage of time, or both, violate or
result in a breach of, conflict with, default, right to accelerate or loss of
rights under, or result in the creation of any Lien pursuant to, any provision
of Esenjay's organizational documents or bylaws, or any mortgage, deed of trust,
lease, license, agreement, or understanding, to which Esenjay is a party or any
of Esenjay's assets is subject, or any order, judgment or decree to which
Esenjay is a party or by which Esenjay or its assets may be bound or affected,
or to Esenjay's knowledge, any law ordinance, rule or regulation to which
Esenjay or its assets is subject.
6.04 CAPITALIZATION.
(a) ESENJAY. The authorized capital stock of Esenjay consists of
100,000 shares of common stock, of which 100,000 shares are issued and
outstanding as of the date hereof. All of the issued and outstanding
shares of common stock of Esenjay are owned by the Esenjay Shareholders.
There are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, convertible securities or other
agreements or arrangements of any character or nature whatsoever under
which Esenjay may become obligated to issue, assign, transfer or
repurchase any shares of the capital stock or other equity interest in
Esenjay. All of the outstanding shares of Esenjay common stock have been
validly issued and are fully paid and nonassessable.
(b) OTHER ENTITIES. Except as set forth on Disclosure
Schedule-Esenjay, Esenjay has no interest, direct or indirect, and has no
commitment to purchase any interest, direct or indirect, in any other
corporation or in any partnership or other business entity.
6.05 FINANCIAL STATEMENTS. Esenjay has furnished or made available to
Frontier and Aspect its financial statements for the twelve month period ending
December 31, 1996, including an unaudited, internally prepared balance sheet as
of the end of such twelve month period and unaudited, internally prepared
statements of income and shareholders' equity for such twelve month period
(collectively, the "Esenjay Financial Statements"). The Esenjay Financial
Statements which are incorporated into this Agreement for all purposes are
complete and correct in all material respects, and present fairly the financial
condition of Esenjay as at the dates thereof and the results of their operations
for the periods covered thereby.
6.06 ABSENCE OF UNDISCLOSED LIABILITIES. Esenjay has no liabilities
(whether known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including liabilities for Taxes), except for
(a) liabilities set forth on the face of the Esenjay Financial Statements, (b)
liabilities which have arisen after the date of the Esenjay Financial Statements
in the ordinary course of business and consistent with past experience and
practice, and (c) liabilities under this Agreement.
6.07 ABSENCE OF EVENTS. Except as set forth on the Disclosure
Schedule-Esenjay, since December 31, 1996, no event has occurred that could have
a Material Adverse Effect on Esenjay and Esenjay has not done any of the
following:
(a) mortgaged, pledged or subjected to lien, charge, security interest
or any other encumbrance or restriction any Esenjay Assets, other than
Permitted Encumbrances;
(b) sold, transferred or otherwise disposed of any Esenjay Assets;
(c) other than in the ordinary course of business and consistent with
prior practice, made any change in the rate of compensation, commission,
bonus or other direct or indirect remuneration payable, or paid or agreed or
orally promised to pay, conditionally or otherwise, any bonus, extra
compensation, reimbursement, pension or severance or vacation pay, to any
shareholder, partner, director, officer, employee or agent;
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(d) issued or sold any shares of capital stock or partnership interest
or other securities, or issued, granted or sold any options, rights or
warrants with respect thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders, made any loans
or advances or guaranteed any loans or advances to any person, or otherwise
incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent with
past practices);
(f) amended its certificate or articles of incorporation, by-laws, or
similar documents;
(g) entered into any transaction, contract or commitment other than in
the ordinary course of business and consistent with prior practice;
(h) adopted any employee benefit plan or made any change in any existing
employee benefit plans or made any bonus or profit sharing distribution or
granted any stock options;
(i) received any notice of default or termination or suffered any
damage, destruction, loss (whether or not covered by insurance) or any other
change, event or condition which in any case or in the aggregate, has had or
may have a Material Adverse Effect on Esenjay;
(j) entered into any agreement or made any commitment to take any of the
types of actions described in paragraphs (a) through (i) or that could have
a Material Adverse Effect on Esenjay.
6.08 TAXES. Except as set forth in the Disclosure Schedule-Esenjay, each
of the following is true with respect to Esenjay:
(a) To the best of Esenjay's knowledge, Esenjay has paid all material
Taxes required to be paid by it (whether or not shown on a Tax Return) or
for which it is liable, whether to taxing authorities or to other persons
under tax allocation agreements;
(b) there are no agreements or consents currently in effect for the
extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of Esenjay for any period ending on or before the Closing Date
and Esenjay has not been requested to enter into any such agreement or
consent;
(c) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of Esenjay;
(d) all material Taxes that Esenjay is required by law to withhold or
collect have been duly withheld or collected, and have been timely paid over
to the appropriate governmental authorities to the extent due and payable;
(e) Esenjay is not a party to any agreement, contract, arrangement or
plan that would result, separately or in the aggregate, in the payment of
any "excess parachute payments" within the meaning of Code Section 280G;
(f) Esenjay has not agreed, nor is it required, to make any adjustment
under Code Section 481(a) (or any comparable provision of state or local
law) by reason of a change in accounting method or otherwise;
(g) Esenjay has not filed a consent pursuant to the collapsible
corporation provisions of Code Section 341(f) (or any corresponding
provision of state, local or foreign income law) or agreed to have Code
Section 341(f)(2) (or any corresponding provision of state, local or foreign
income law) apply to any disposition of any asset owned by it;
(h) Esenjay has never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code and is not
subject to any Tax liability of any other person, including any
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liability arising from the application of U.S. Treasury Regulation Section
1.1502-6 or any analogous provisions of state, local or foreign law; and
(i) Esenjay is not (and never has been) a party to any tax sharing
agreement and has not assumed the tax liability of any other person under
contract.
6.09 LITIGATION. There is no legal, administrative, arbitration other
proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Esenjay, threatened against Esenjay except
as set forth on the Disclosure Schedule-Esenjay.
6.10 COMPLIANCE WITH LAWS, MATERIAL AGREEMENTS AND PERMITS. With respect
to the Esenjay Assets, Esenjay is not in violation of, or in default under, and
no event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under, (a) its articles of incorporation or
by-laws, (b) any applicable law, rule, regulation, order, writ, decree or
judgment of any Governmental Authority, or (c) any agreement to which Esenjay is
a party or to which any of its assets is subject or bound. Esenjay has obtained
and holds all permits, licenses, variances, exemptions, orders, franchises,
approvals and authorizations of all Governmental Authorities necessary for the
lawful conduct of its business or the lawful ownership, use and operation of its
assets ("Esenjay Permits"), except for Esenjay Permits which the failure to
obtain or hold would not, individually or in the aggregate, have a Material
Adverse Effect on Esenjay. Esenjay is in compliance with the terms of its
Esenjay Permits, except where the failure to comply would not, individually or
in the aggregate, have a Material Adverse Effect on Esenjay. No investigation or
review by any Governmental Authority with respect to Esenjay is pending or, to
the knowledge of Esenjay, threatened, other than those the outcome of which
would not, individually or in the aggregate, have a Material Adverse Effect on
Esenjay. To the knowledge of Esenjay, no party to any material agreement
affecting the Esenjay Assets or by which the Esenjay Assets are bound is in
breach of any of the material terms, provisions or conditions of such agreement.
6.11 ENVIRONMENTAL MATTERS. With respect to the Esenjay Assets, consistent
with its status as operator or non-operator, as the case may be:
(a) Esenjay has conducted its business and operated its assets, and is
conducting its business and operating its assets, in material compliance
with all Environmental Laws;
(b) Esenjay has not been notified by any Governmental Authority or other
third party that any of the operations or assets of Esenjay is the subject
of any investigation or inquiry by any Governmental Authority or other third
party evaluating whether any remedial action is needed to respond to a
release or threatened release of any Hazardous Material or to the improper
treatment, storage or disposal (including treatment, storage or disposal at
offsite locations) of any Hazardous Material;
(c) Neither Esenjay nor any other person has filed any notice under any
federal, state or local law indicating that (i) Esenjay is responsible for
the improper release into the environment, or the improper treatment,
storage or disposal, of any Hazardous Material, or (ii) any Hazardous
Material is improperly treated, stored or disposed of upon any property of
Esenjay;
(d) Esenjay has no contingent liability in connection with (i) the
release or threatened release into the environment at, beneath or on any
property now or previously owned or leased by Esenjay, (ii) the treatment,
storage or disposal of any Hazardous Material, or (iii) any other claims
(including common law claims) with respect to damage to health, safety or
the environment;
(e) Esenjay has not received any claim, complaint, notice, inquiry or
request for information involving any matter which remains unresolved as of
the date hereof with respect to any alleged violation of any Environmental
Law or regarding potential liability under any Environmental Law or relating
to any other claims (including common law claims) with respect to damage to
health, safety or the environment relating to operations or conditions of
any facilities or property (including off-site
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treatment, storage or disposal of any Hazardous Material from such
facilities or property) currently or formerly owned, leased or operated by
Esenjay;
(f) No property now or previously owned, leased or operated by Esenjay
is listed on the National Priorities List pursuant to CERCLA or on the
CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
(g) Esenjay is not directly transporting, has not directly transported,
is not directly arranging for the transportation of, and has not directly
arranged for the transportation of, any Hazardous Material to any location
which is listed on the National Priorities List pursuant to CERCLA, on the
CERCLIS, or on any similar federal or state list or which is the subject of
federal, state or local enforcement actions or other investigations that may
lead to material claims against such company for response costs, damage to
natural resources or personal injury, including claims under CERCLA;
(h) There are no sites, locations or operations at which Esenjay is
currently undertaking, or has completed, any remedial or response action
relating to any release or threatened release of Hazardous Materials, as
required by Environmental Laws or in response to a common law claim or a
potential common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid waste
disposal facilities owned or operated by Esenjay are used and operated in
material compliance with Environmental Laws.
6.12 TITLE TO ASSETS OTHER THAN OIL AND GAS INTERESTS. Except for Oil and
Gas Interests (which are covered by Section 6.13 hereof), Esenjay has good and
marketable title to, or valid leasehold interests in, all of the properties and
assets that are included in the Esenjay Assets. Except for any Permitted
Encumbrance, none of such properties and assets are subject to any Lien,
easement, liability or adverse claim of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or otherwise. All of such
properties and assets owned or leased are in good operating condition and repair
(normal wear and tear excepted).
6.13 TITLE TO OIL AND GAS INTERESTS. Schedule 2.01 contains a complete and
accurate list of Esenjay's Oil and Gas Interests that are being conveyed
pursuant to the Exchange and sets forth (i) the Working Interests of Esenjay
therein to the extent being conveyed hereby, and (ii) sufficient detail to
determine the Net Revenue Interests of Esenjay therein to the extent being
conveyed hereby. Except as set forth in the Disclosure Schedule-Esenjay and
solely with respect to the Oil and Gas Interests that are included in the
Esenjay Assets:
(a) Esenjay (individually or collectively) has Defensible Title to
Esenjay's Oil and Gas Interests;
(b) the leases and related agreements forming any part of Esenjay's Oil
and Gas Interests are in full force and effect and are valid and legally
binding agreements among the parties thereto, their successors and assigns,
enforceable in accordance with their terms in all material respects except
for applicable bankruptcy and insolvency laws. All rentals, royalties and
other payments due and payable under any such leases and other contracts and
agreements forming a part of Esenjay's Oil and Gas Interests have been
properly and timely paid and all other obligations under such leases and
related agreements attendant to the ownership of Esenjay's Oil and Gas
Interests have been met; and
(c) there are no back-in, reversionary or similar interests (the vesting
of which is subject to future production) held by third parties which would
reduce the interests of Esenjay in Esenjay's Oil and Gas Interests from that
shown on the Property Schedule.
6.14 BROKER/FINDERS. No broker, finder, investment banker other than as
set forth in Disclosure Schedule-Esenjay, or other person is or will be, in
connection with the Exchange, entitled to any brokerage or investment bankers
fees, commissions or finders fees based on any arrangement made by or on behalf
of Esenjay and for which any party hereto will have any liability or obligation.
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6.15 ROYALTIES. To the knowledge of Esenjay, all royalties, overriding
royalties, compensatory royalties and other payments due from or in respect of
production with respect to Oil and Gas Interests included in the Esenjay Assets,
have been or will be, prior to the Closing Date, properly and correctly paid or
provided for in all material respects, except for those for which Esenjay has a
valid right to suspend. Esenjay has not received any written notice of default
from any party alleging that Esenjay is in default under the terms of any lease
or other agreement relating to the Oil and Gas Interests included in the Esenjay
Assets, or that any such lease or other agreement is invalid.
6.16 GAS IMBALANCES. Except as identified on the Disclosure
Schedule-Esenjay, Esenjay has not received any deficiency payments under gas
contracts for which any party has a right to take deficiency gas from Esenjay,
nor has Esenjay received any payments for production which are subject to refund
or recoupment out of future production. There is no Oil and Gas Interest with
respect to which Esenjay and its predecessors in title to the Esenjay Oil and
Gas Interests have collectively taken more (referred to herein as
"over-produced") or less (referred to herein as "under-produced") production
from such well than the ownership would entitle Esenjay and such predecessors to
receive (absent any gas balancing agreement or arrangement). There exist no gas
balancing arrangements or agreements whereby over-production from wells other
than Esenjay Oil and Gas Interests can be balanced with production from the Oil
and Gas Interests. None of the Esenjay Oil and Gas Interests is subject to
having allowable production after the date hereof reduced below the full and
regular allowable (including the maximum permissible tolerance) because of any
over-production (whether or not the same was permissible at the time) prior to
the date hereof. With respect to the Esenjay Assets, a breach of this
representation and warranty shall be treated as a Title Defect and an adjustment
shall be made in accordance with the provisions of clause (b) of Section 11.04.
6.17 HEDGING ACTIVITIES. Except as set forth in the Disclosure
Schedule-Esenjay, Esenjay does not participate in any hedging activities.
6.18 CERTAIN BUSINESS RELATIONSHIPS OR TRANSACTIONS WITH AFFILIATES. The
Disclosure Schedule-Esenjay sets forth a complete and accurate list of any
agreement, contract, arrangement or understanding to which Esenjay is a party
for the direct or indirect benefit of any of the Esenjay Shareholders (or, as
the case may be, their family members, directors, officers or employees, or
other affiliates). None of the Esenjay Shareholders (or, as the case may be,
their family members, directors, officers or employees, or other affiliates)
owns any material asset, tangible or intangible, which is used in the business
of Esenjay.
6.19 NO GUARANTEES. Esenjay has not directly or indirectly guaranteed the
obligations of or liabilities of any other person, firm or corporation.
6.20 EMPLOYEE MATTERS. Esenjay has provided to each of Aspect and Frontier
a true and correct list detailing the following information for each Esenjay
employee: the name, current annual compensation and base salary rate (including
bonuses and commissions and any increases in compensation or base salary since
December 31, 1996), accrued bonus, accrued sick leave, accrued severance pay and
accrued vacation benefits. The liability of Esenjay for accrued sick leave and
accrued vacation benefits of the Esenjay employees does not exceed $102,043.62,
in the aggregate. There are no charges of, formal, informal or internal
complaints of, or proceeding involving, discrimination or harassment (including
discrimination or harassment based upon sex, age, marital status, race,
religion, color, creed, national origin, sexual preference, handicap or veteran
status) pending or, to the knowledge of Esenjay, threatened; nor is there any
investigation pending or, to the knowledge of Esenjay, threatened, including
investigations before the Equal Employment Opportunity Commission or any
federal, state or local agency or court with respect to any current or former
employee of Esenjay.
6.21 EMPLOYEE BENEFIT PLANS. With respect to Esenjay:
(a) The Disclosure Schedule-Esenjay lists each Employee Plan that
Esenjay maintains, administers, contributes to, or has any contingent
liability with respect thereto. Esenjay has provided to
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Aspect and Frontier a true and complete copy of each such written Employee
Plan and each material oral Employee Plan, current summary plan description,
(and, if applicable, related trust documents) and all amendments thereto,
together with (i) the three most recent annual reports, if any, prepared in
connection with each such Employee Plan (Form 5500 including, if applicable,
Schedule B thereto); (ii) the most recent actuarial report, if any, and
trust reports prepared in connection with each Employee Plan; (iii) all
material communications received from or sent to the IRS or the DOL within
the last two years (including a written description of any material oral
communications relating to the IRS Voluntary Compliance Resolution or
Closing Agreement Programs); (iv) the most recent IRS determination letter
with respect to each Employee Plan and the most recent application for a
determination letter, both as applicable; (v) all insurance contracts or
other funding arrangements, currently in force; and (vi) an actuarial study
of any post-employment life or medical benefits provided, if any.
(b) The Disclosure Schedule-Esenjay identifies each Benefit Arrangement
that Esenjay maintains, administers, contributes to, or has any contingent
liability with respect thereto. Each Benefit Arrangement has been maintained
and administered in substantial compliance with its terms and with the
requirements (including reporting requirements, if any) prescribed by any
and all statutes, orders, rules and regulations which are applicable to such
Benefit Arrangement.
(c) Benefits under any Employee Plan or Benefit Arrangement are as
represented in said documents and have not been increased or modified
(whether written or not written) subsequent to the dates of such documents.
To the knowledge of Esenjay, except as set forth on the Disclosure
Schedule-Esenjay, Esenjay has not communicated to any employee or former
employee any intention or commitment to modify any Employee Plan or Benefit
Arrangement or to establish or implement any other employee or retiree
benefit or compensation arrangement.
(d) No Employee Plan is (i) a Multiemployer Plan, (ii) an Employee Plan,
other than any Multiemployer Plan, subject to Title IV of ERISA, (iii)
maintained in connection with any trust described in Section 501(c)(9) of
the Code or (iv) a plan to which Section 412 of the Code applies. Esenjay
has never maintained or become obligated to contribute to any employee
benefit plan (i) that is subject to Title IV of ERISA, (ii) to which Section
412 of the Code applies, or (iii) that is a Multiemployer Plan or (iv) that
is maintained in connection with any trust described in Section 501(c)(9) of
the Code. Esenjay has not within the last five years engaged in, or is a
successor corporation to an entity that has engaged in, a transaction
described in Section 4069 of ERISA. Esenjay is not subject to withdrawal
liability (whether asserted or unasserted) under Section 4201, et seq. of
ERISA.
(e) Each Employee Plan which is intended to be qualified under Section
40l(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and no event has occurred since such
adoption that would adversely affect such qualification and each trust
created in connection with each such Employee Plan forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. A favorable
determination letter has been issued by the IRS as to the qualification of
each such Employee Plan for which a determination is available under the
Code and to the effect that each such trust is exempt from taxation under
Section 501(a) of the Code. Each Employee Plan has been maintained and
administered in substantial compliance with its terms and with the
requirements (including reporting requirements, if any) prescribed by any
and all applicable statutes, orders, rules and regulations, including ERISA
and the Code.
(f) Full payment has been made of all amounts which Esenjay is or has
been required to have paid as contributions to or benefits due under any
Employee Plan or Benefit Arrangement under applicable law or under the terms
of any such plan or any arrangement.
(g) Neither Esenjay nor any of its respective directors, officers or
employees has engaged in any transaction with respect to an Employee Plan
that could subject Esenjay to a tax, penalty or liability
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for a prohibited transaction, as defined in Section 406 of ERISA or Section
4975 of the Code. None of the assets of any Employee Plan are invested in
employer securities or employer real property.
(h) To the knowledge of Esenjay, there are no facts or circumstances
that might give rise to any liability under Title I of ERISA.
(i) Esenjay has no current or projected liability in respect of
post-retirement or post-employment welfare benefits for retired, current or
former employees, except as required to avoid excise tax under Section 4980B
of the Code, relating to COBRA.
(j) There is no litigation, administrative or arbitration proceeding or
other dispute pending or, to the knowledge of Esenjay, threatened that
involves any Employee Plan or Benefit Arrangement.
(k) No employee or former employee of Esenjay will become entitled to
any bonus, retirement, severance, job security or similar benefit or
enhanced benefit (including acceleration of an award, vesting or exercise of
an incentive award) or any fee or payment of any kind solely as a result of
any of the transactions contemplated hereby, except as disclosed on the
Disclosure Schedule-Esenjay and no such disclosed payment constitutes a
parachute payment described in Section 280G of the Code, except as disclosed
in the Disclosure Schedule-Esenjay.
(l) To the knowledge of Esenjay, all group health plans (as defined in
Code Section 5000(b)(1) and as defined in ERISA Section 607(i)) of Esenjay
have at all times fully complied with all applicable notification and
continuation coverage requirements of Section 4980B(f) of the Code and
Section 601 of ERISA, and the regulations promulgated thereunder. Further,
no Employee Plan provides health, medical, death or survivor benefits to any
stockholders or directors who are not employees, former employees or
beneficiaries thereof, except to the extent otherwise required by the
continuation requirements of Section 4980B(f) of the Code and Section 601 of
ERISA, and to the knowledge of Esenjay there are no claims by terminated
employees with respect thereto.
(m) Except as set forth in the Disclosure Schedule-Esenjay, no employee
or former employee, officer or director of Esenjay is or will become
entitled to receive any award under any discretionary or other bonus plans.
(n) All obligations under any Employee Plans and/or Benefit Arrangements
have been in the aggregate, accrued on the Esenjay Financial Statements to
the extent required (including items relating to vesting via passage of time
or as a result of the transaction contemplated by this Agreement).
6.22 PLUGGING AND ABANDONMENT LIABILITIES. To the best knowledge of
Esenjay, except as reflected in the Esenjay Financial Statements or in the
Disclosure Schedule-Esenjay, Esenjay has no obligation, in relation to the
Esenjay Assets, under applicable contract, statute or regulation to plug and
dismantle any well.
6.23 PREPAYMENTS. No prepayment for Hydrocarbon sales has been received by
Esenjay for Hydrocarbons which have not been delivered as of the date hereof.
6.24 CALLS ON PRODUCTION. To the best knowledge of Esenjay, except as set
forth in the Disclosure Schedule-Esenjay, no party has a call or a preferential
right to purchase production from Esenjay's Oil and Gas Interests.
6.25 OIL AND GAS OPERATIONS. To the best knowledge of Esenjay, all wells
included in the Esenjay Assets have been drilled and completed (if applicable),
operated and produced in accordance with generally accepted oil and gas field
practices and in compliance in all material respects with applicable leases and
applicable laws, rules and regulations, except where any failure or violation
could not reasonably be expected to have a Material Adverse Effect on the
Esenjay Assets. Proceeds from the sale of Hydrocarbons produced from Oil and Gas
Interests included in the Esenjay Assets are being received by
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Esenjay in a timely manner and are not being held in suspense for any reason
(except for amounts, individually or in the aggregate, not in excess of $25,000
and held in suspense in the ordinary course of business). None of the Oil and
Gas Interests included in the Esenjay Assets are subject to production
curtailments, and, to the knowledge of the Esenjay, no such production
curtailment is pending or threatened.
6.26 TAX REPRESENTATIONS. To the knowledge of Esenjay, each of the
following representations are true, correct and complete and will continue to be
true, correct and complete as of the Closing Date:
(a) the Frontier Common Stock to be issued to Esenjay at the Closing
will not be issued in satisfaction of an indebtedness of Frontier or
interest on indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits and
Schedules hereto, the transfers of the Esenjay Assets to Frontier are not
the result of the solicitation of a promoter, broker, or investment house;
(c) Frontier will not, other than specifically set forth in this
Agreement, assume any liabilities of Esenjay in connection with the
Exchange;
(d) other than as expressly set forth in this Agreement and other than
any liabilities arising under the New Debt agreement, there is no
indebtedness between Esenjay and Frontier and there will be no indebtedness
created by Frontier in favor of Esenjay or the Esenjay Shareholders as a
result of the Exchange;
(e) Esenjay will receive Frontier Common Stock at the Closing
approximately equal to the net fair market value of the Esenjay Assets
transferred by Esenjay to Frontier;
(f) other than as set forth in this Agreement, Esenjay will pay its own
expenses, if any, incurred in connection with the Exchange;
(g) Esenjay is not under the jurisdiction of a court in a title 11 or
similar case (within the meaning of Section 368(a)(3)(A) of the Code) and
the Frontier Common Stock to be received in the Exchange will not be used to
satisfy any indebtedness of such party;
(h) All of the Frontier Common Stock that Esenjay will receive as part
of the Exchange will be received in exchange for the property transferred by
Esenjay to Frontier pursuant to this Agreement, and none of such common
stock will constitute separate consideration for, or be allocable to, any
employment, consulting or other services provided to (or that will be
provided to) Frontier by Esenjay or the Esenjay Shareholders (or any other
person) either in connection with the Exchange or otherwise;
(i) Except as set forth on Schedule 2.01, Esenjay will not retain any
rights or interests in the property transferred to Frontier as part of the
Exchange; and
(j) Esenjay has no plan or intention to sell, exchange, or otherwise
dispose of any of the Frontier Common Stock to be received by Esenjay
pursuant hereto.
6.27 DISCLOSURE. The representations, warranties and statements made by
Esenjay in this Agreement, and in the certificates and other documents delivered
pursuant hereto, do not contain any untrue statement of a material fact, and,
when taken together, do no omit to state any material fact necessary to make
such representations, warranties and statements, in light of the circumstances
under which they are made, not misleading. Since the date of the most recent
Esenjay Financial Statement, there have not been any events, changes or
developments relating to Esenjay that are reasonably likely to have a Material
Adverse Effect on Esenjay.
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ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF ASPECT
As a material part of the consideration for this Agreement, Aspect
represents and warrants to Esenjay and Frontier as of the date of this Agreement
and as of the Closing Date as follows:
7.01 ORGANIZATION, STANDING AND QUALIFICATION. Aspect is a limited
liability corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado. Aspect has all requisite limited
liability company power and authority to carry on its business as now being
conducted and to own, lease or operate its properties, if any, as and in the
places where such business is now conducted and such properties, if any, are now
owned, leased or operated. Aspect is qualified and in good standing to do
business in all states in which the nature of its business requires it to be
qualified.
7.02 EXECUTION, DELIVERY AND PERFORMANCE OF AGREEMENT; AUTHORITY. Aspect
has full limited liability company power and authority to enter into this
Agreement and the Related Documents to which it is a party, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Aspect of this Agreement and the Related Documents to which it is a party have
been duly and validly approved by all necessary limited liability company action
and no other actions or proceeding on the part of Aspect are necessary to
authorize this Agreement and the Related Documents to which it is a party and
the transactions contemplated hereby and thereby. This Agreement constitutes,
and the Related Documents to which it is a party when executed will constitute,
legal, valid and binding obligations of Aspect, enforceable against Aspect in
accordance with their respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws in effect that affect the enforcement of creditors' rights
generally and by equitable limitations on the availability of specific remedies.
7.03 CONFLICTS. The execution, delivery and performance of this Agreement
and the Related Documents to which it is a party by Aspect do not and will not,
with or without the giving of notice or the passage of time, or both, violate or
result in a breach of, conflict with, default, right to accelerate or loss of
rights under, or result in the creation of any Lien pursuant to, any provision
of Aspect's articles of organization or operating agreement, or any mortgage,
deed of trust, lease, license, agreement, or understanding, to which Aspect is a
party or any of Aspect's assets is subject, or any order, judgment or decree to
which Aspect is a party or by which Aspect or its assets may be bound or
affected, or to Aspect's knowledge, any law ordinance, rule or regulation to
which Aspect or its assets is subject.
7.04 ASPECT ASSETS. The Aspect Assets represent no more than fifty percent
(50%) of the Aspect's net asset value.
7.05 TAXES. Except as set forth in the Disclosure Schedule-Aspect, each of
the following is true with respect to Aspect:
(a) all Tax Returns required to be filed by Aspect have been filed when
due, including legal periods permitted by extensions, in accordance with all
applicable laws; all material Taxes shown on such Tax Returns have been
timely paid when due; the Tax Returns have been properly completed in
compliance in all material respects with all applicable laws and regulations
and completely and accurately reflect the facts regarding the income,
expenses, properties, businesses and operations required to be shown
thereon;
(b) Aspect has paid all material Taxes required to be paid by it
(whether or not shown on a Tax Return) or for which it is liable, whether to
taxing authorities or to other persons under tax allocation agreements;
(c) there are no agreements or consents currently in effect for the
extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income,
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properties or operations of Aspect for any period ending on or before the
Closing Date and Aspect has not been requested to enter into any such
agreement or consent;
(d) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of Aspect; and
(e) all material Taxes that the Aspect is required by law to withhold or
collect have been duly withheld or collected, and have been timely paid over
to the appropriate governmental authorities to the extent due and payable.
7.06 LITIGATION. There is no legal, administrative, arbitration other
proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Aspect, threatened against Aspect and
relating to the Aspect Assets.
7.07 COMPLIANCE WITH LAWS, MATERIAL AGREEMENTS AND PERMITS. With respect
to the Aspect Assets, Aspect is not in violation of, or in default under, and no
event has occurred that (with notice or the lapse of time or both) would
constitute a violation of or default under, (i) its articles of incorporation,
or by-laws, (ii) any applicable law, rule, regulation, order, writ, decree or
judgment of any Governmental Authority, or (iii) any agreement to which Aspect
is a party or to which any of its assets is subject or bound. Aspect has
obtained and holds all permits, licenses, variances, exemptions, orders,
franchises, approvals and authorizations of all Governmental Authorities
necessary for the lawful conduct of its business or the lawful ownership, use
and operation of its assets ("Aspect Permits"), except for Aspect Permits which
the failure to obtain or hold would not, individually or in the aggregate, have
a Material Adverse Effect on Aspect. Aspect is in compliance with the terms of
its Aspect Permits, except where the failure to comply would not, individually
or in the aggregate, have a Material Adverse Effect on Aspect. No investigation
or review by any Governmental Authority with respect to Aspect is pending or, to
the knowledge of Aspect, threatened, other than those the outcome of which would
not, individually or in the aggregate, have a Material Adverse Effect on Aspect.
To the knowledge of Aspect, no party to any material agreement affecting the
Aspect Assets or by which the Aspect Assets are bound is in breach of any of the
material terms, provisions or conditions of such agreement.
7.08 ENVIRONMENTAL MATTERS. With respect to the Aspect Assets, consistent
with its status as operator or non-operator, as the case may be:
(a) Aspect has conducted its business and operated its assets, and is
conducting its business and operating its assets, in material compliance
with all Environmental Laws;
(b) Aspect has not been notified by any Governmental Authority or other
third party that any of the operations or assets of Aspect is the subject of
any investigation or inquiry by any Governmental Authority or other third
party evaluating whether any remedial action is needed to respond to a
release or threatened release of any Hazardous Material or to the improper
treatment, storage or disposal (including treatment, storage or disposal at
offsite locations) of any Hazardous Material;
(c) Neither Aspect nor any other person has filed any notice under any
federal, state or local law indicating that (i) Aspect is responsible for
the improper release into the environment, or the improper treatment,
storage or disposal, of any Hazardous Material, or (ii) any Hazardous
Material is improperly treated, stored or disposed of upon any property of
Aspect;
(d) Aspect has no contingent liability in connection with (i) the
release or threatened release into the environment at, beneath or on any
property now or previously owned or leased by Aspect, (ii) the treatment,
storage or disposal of any Hazardous Material, or (iii) any other claims
(including common law claims) with respect to damage to health, safety or
the environment;
(e) Aspect has not received any claim, complaint, notice, inquiry or
request for information involving any matter which remains unresolved as of
the date hereof with respect to any alleged
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violation of any Environmental Law or regarding potential liability under
any Environmental Law or relating to any other claims (including common law
claims) with respect to damage to health, safety or the environment relating
to operations or conditions of any facilities or property (including
off-site treatment, storage or disposal of any Hazardous Material from such
facilities or property) currently or formerly owned, leased or operated by
Aspect;
(f) No property now or previously owned, leased or operated by Aspect is
listed on the National Priorities List pursuant to CERCLA or on the CERCLIS
or on any other federal or state list as sites requiring investigation or
cleanup;
(g) Aspect is not directly transporting, has not directly transported,
is not directly arranging for the transportation of, and has not directly
arranged for the transportation of, any Hazardous Material to any location
which is listed on the National Priorities List pursuant to CERCLA, on the
CERCLIS, or on any similar federal or state list or which is the subject of
federal, state or local enforcement actions or other investigations that may
lead to material claims against such company for response costs, damage to
natural resources or personal injury, including claims under CERCLA;
(h) There are no sites, locations or operations at which Aspect is
currently undertaking, or has completed, any remedial or response action
relating to any release or threatened release of Hazardous Materials, as
required by Environmental Laws or in response to a common law claim or a
potential common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid waste
disposal facilities owned or operated by Aspect are used and operated in
material compliance with Environmental Laws.
7.09 TITLE TO ASSETS OTHER THAN OIL AND GAS INTERESTS. Except for Oil and
Gas Interests (which are covered by Section 7.09 hereof), Aspect has good and
marketable title to, or valid leasehold interests in, all of the properties and
assets that are included in the Aspect Assets. Except for any Permitted
Encumbrance, none of such properties and assets are subject to any Lien,
easement, liability or adverse claim of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or otherwise. All of such
properties and assets owned or leased are in good operating condition and repair
(normal wear and tear excepted).
7.10 TITLE TO OIL AND GAS INTERESTS. Schedule 3.01 contains a complete and
accurate list of Aspect's Oil and Gas Interests that are being conveyed pursuant
to the Exchange and sets forth (i) the Working Interests of Aspect therein to
the extent being conveyed hereby, and (ii) sufficient detail to determine the
Net Revenue Interests of Aspect therein to the extent being conveyed hereby.
Except as set forth in the Disclosure Schedule-Aspect and solely with respect to
the Oil and Gas Interest that are included in the Aspect Assets:
(a) Aspect (individually or collectively) has Defensible Title to
Aspect's Oil and Gas Interests;
(b) the leases and related agreements forming any part of Aspect's Oil
and Gas Interests are in full force and effect and are valid and legally
binding agreements among the parties thereto, their successors and assigns,
enforceable in accordance with their terms in all material respects except
for applicable bankruptcy and insolvency laws. All rentals, royalties and
other payments due and payable under any such leases and other contracts and
agreements forming a part of Aspect's Oil and Gas Interests have been
properly and timely paid and all other obligations under such leases and
related agreements attendant to the ownership of Aspect's Oil and Gas
Interests have been met; and
(c) there are no back-in, reversionary or similar interests (the vesting
of which is subject to future production) held by third parties which would
reduce the interests of Aspect in Aspect's Oil and Gas Interests from that
shown on the Property Schedule.
7.11 BROKER/FINDERS. No broker, finder, investment banker other than as
set forth in Disclosure Schedule-Aspect, or other person is or will be, in
connection with the Exchange, entitled to any brokerage
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or investment bankers fees, commissions or finders fees based on any arrangement
made by or on behalf of Aspect and for which any party hereto will have any
liability or obligation.
7.12 TAX REPRESENTATIONS. To the knowledge of Aspect, each of the
following representations are true, correct and complete and will continue to be
true, correct and complete as of the Closing Date:
(a) the Frontier Common Stock to be issued to Aspect at the Closing will
not be issued in satisfaction of an indebtedness of Frontier or interest on
indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits and
Schedules hereto, the transfers of the Aspect Assets to Frontier are not the
result of the solicitation of a promoter, broker, or investment house;
(c) Frontier will not, other than specifically set forth in this
Agreement, assume any liabilities of Aspect in connection with the Exchange;
(d) other than as expressly set forth in this Agreement and the Exhibits
hereto, there is no indebtedness between Aspect and Frontier and there will
be no indebtedness created by Frontier in favor of Aspect or the Aspect
Members as a result of the Exchange;
(e) Aspect will receive Frontier Common Stock at the Closing
approximately equal to the fair market value of the Aspect Assets
transferred by Aspect to Frontier;
(f) other than as set forth in this Agreement, Aspect will pay its own
expenses, if any, incurred in connection with the Exchange;
(g) Aspect is not under the jurisdiction of a court in a title 11 or
similar case (within the meaning of Section 368(a)(3)(A) of the Code) and
the Frontier Common Stock to be received in the Exchange will not be used to
satisfy any indebtedness of such party;
(h) All of the Frontier Common Stock that Aspect will receive as part of
the Exchange will be received in exchange for the property transferred by
Aspect to Frontier pursuant to this Agreement, and none of such common stock
will constitute separate consideration for, or be allocable to, any
employment, consulting or other services provided to (or that will be
provided to) Frontier by Aspect or the Aspect Members (or any other person)
either in connection with the Exchange or otherwise;
(i) Except as set forth on Schedule 3.01, Aspect will not retain any
rights or interests in the property transferred to Frontier as part of the
Exchange; and
(j) Aspect has no plan or intention to sell, exchange, or otherwise
dispose of any of the Frontier Common Stock to be received by Aspect
pursuant hereto.
7.13 DISCLOSURE. The representations, warranties and statements made by
Aspect in this Agreement, and in the certificates and other documents delivered
pursuant hereto, do not contain any untrue statement of a material fact, and,
when taken together, do no omit to state any material fact necessary to make
such representations, warranties and statements, in light of the circumstances
under which they are made, not misleading.
ARTICLE VIII
COVENANTS AND OTHER AGREEMENTS
8.01 ACCESS TO RECORDS AND PROPERTIES. Except to the extent limited by
agreement with third parties, between the date of this Agreement and the Closing
Date, Frontier, Esenjay and Aspect shall give each other full access to all
their respective premises, properties and books and records and will cause their
respective employees, agents and representatives to furnish financial and
operating data and other information with respect to each other party as the
other from time to time reasonably requests; provided, however, that any such
investigation shall be conducted in such a manner as not to interfere
unreasonably
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with the operation of the providing parties business. Any such furnishing of
such information to the parties or any investigation by the parties, shall not
affect each party's right to rely on any representations and warranties made in
this Agreement. Except as required by law, all information furnished pursuant
hereto shall not be disclosed and shall be kept confidential from all third
parties unless the party who furnished such information consents in writing to
the disclosure of all or part of such information. In the event of any
termination of this Agreement, each party will return all documents, work papers
and other materials (including all copies thereof) obtained pursuant hereto and
in connection with the Exchange, and for a period of one year after such
termination (i) will use all reasonable efforts to keep confidential any
information obtained pursuant to this Agreement, except to the extent required
by law or unless such information is readily ascertainable from public or
published information or trade sources, and (ii) will not use any of the
information obtained in connection with the Exchange, except in connection
therewith.
8.02 OPERATION OF THE BUSINESS.
(a) Frontier. From the date hereof to the Closing Date, except to the
extent that Esenjay and Aspect shall otherwise consent, Frontier shall
operate its respective businesses substantially as presently operated and
only in the ordinary course, and, consistent with such operation, shall use
its best efforts to preserve intact its respective present business
organizations and relationships with persons having dealings with them. In
addition, Frontier shall promptly notify Esenjay and Aspect of (i) the
receipt by Frontier of any notice or claim, written or oral, of default or
breach by Frontier, or of any modification, termination or cancellation, or
threat of termination or cancellation, of any Frontier Material Agreement;
(ii) any loss of, damage to, or disposition of any of Frontier's Oil and Gas
Interests that is reasonably likely to have a Material Adverse Effect on
Frontier; and (iii) after receipt of notice thereof by Frontier, Frontier
shall give notice to Esenjay and Aspect of any claim or litigation,
threatened or instituted, against Frontier, or of any other event or
circumstance that has or may have a Material Adverse Effect on Frontier.
Without the written consent of Esenjay and Aspect, Frontier (individually or
in the aggregate) shall be prohibited from (w) entering into any single
contract, commitment, indebtedness or liability in excess of $50,000; (x)
making any change in the outstanding equity interests of Frontier Natural
Gas Corporation or any of its Subsidiaries, granting any options, rights,
calls or any other similar commitment or agreement with respect to the
equity interest of such entities, from declaring any dividend or other
distribution in respect of the equity interest of such entities or from
repurchasing any outstanding equity interest; (y) increasing the
compensation payable or to become payable by any such entities to any of its
officers, directors, employees or other agents, other than in the ordinary
course of business; and (z) committing or omitting any act which act or
omission would cause a breach of any covenant contained in this Agreement or
would cause any representation or warranty contained in this Agreement to
become untrue, as if each such representation and warranty were continuously
made from and after the date hereof.
(b) Esenjay. From the date hereof to the Closing Date, except to the
extent Frontier and Aspect shall otherwise consent, Esenjay shall operate
the business of Esenjay substantially as presently operated and only in the
ordinary course and, consistent with such operation, shall use its best
efforts to preserve intact its business organization and relationships. In
addition, Esenjay shall promptly notify Frontier and
Aspect of (i) the receipt by Esenjay of any notice or claim, written or
oral, of default or breach by Esenjay, or of any modification, termination or
cancellation, or threat of termination or cancellation, of any material
agreement of Esenjay; (ii) any loss of, damage to, or disposition of any of the
Esenjay Assets; and (iii) after receipt of notice thereof by Esenjay, give
notice to Frontier and Aspect of any claim or litigation, threatened or
instituted, against Esenjay, or of any other event or circumstance that has or
may have a Material Adverse Effect on Esenjay. Without consent of Frontier and
Aspect, Esenjay shall be prohibited (individually or in the aggregate) from (x)
entering into any single contract, commitment, indebtedness or liability in
excess of $100,000 which contract commitment, indebtedness or liability affects
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the ownership rights to the Esenjay Assets; (y) increasing the compensation
payable or to become payable by any such entities to any of its officers,
directors, employees or other agents, other than in the ordinary course of
business and other than increases in compensation reflected on the employee list
delivered to Frontier and Aspect pursuant to Section 6.20 hereof; and (z)
committing or omitting any act which act or omission would cause a breach of any
covenant contained in this Agreement or would cause any representation or
warranty contained in this Agreement to become untrue, as if each such
representation and warranty were continuously made from and after the date
hereof.
(c) Aspect. From the date hereof to the Closing Date, except to the
extent Frontier and Esenjay shall otherwise consent, Aspect shall operate
the business of Aspect as it relates to the Aspect Assets substantially as
presently operated and only in the ordinary course. In addition, Aspect
shall promptly notify Frontier and Esenjay of (i) the receipt by Aspect of
any notice or claim, written or oral, of default or breach by Aspect, or of
any modification, termination or cancellation, or threat of termination or
cancellation, of any material agreement relative to the Aspect Assets; (ii)
any loss of, damage to, or disposition of any of the Aspect Assets; and
(iii) after receipt of notice thereof by Aspect, give notice to Frontier and
Esenjay of any claim or litigation, threatened or instituted, against Aspect
and relating to the Aspect Assets.
(d) All Parties. Each of the parties shall obtain the consent of the
other parties prior to drilling any new wells on the Oil and Gas Interests
of Frontier or the Oil and Gas Interests included in the Esenjay Assets and
the Aspect Assets.
8.03 CONSENTS. The parties shall each use their best efforts to obtain the
consent or approval of each person or Governmental Authority whose consent or
approval shall be required in order to permit consummation of the Exchange.
8.04 ANNOUNCEMENTS. All pre-Closing and post-Closing press releases, and
other public announcements with respect to this Agreement and the Exchange shall
be approved by Frontier prior to the issuance thereof; provided, however, any
pre-Closing press release of Frontier with respect to this Agreement also shall
be presented prior to the issuance thereof to Aspect and Esenjay for their
comments. Frontier shall, within the confines of its fiduciary and regulatory
obligations, use its reasonable best efforts to incorporate the comments of
Aspect and Esenjay but will not be required to do so.
8.05 NO SOLICITATIONS.
(a) Frontier shall not directly or indirectly, through any officer,
director, employee, representative or agent, solicit or encourage the
initiation or submission of any inquiries, proposals or offers regarding any
acquisition, merger, take-over bid, sale of all or substantially all of the
assets of, or sales of shares of capital stock of Frontier, whether or not
in writing and whether or not delivered to the stockholders of Frontier
generally (including by way of a tender offer), or similar transactions
involving Frontier (any of the foregoing inquiries or proposals being
referred to herein as an "Acquisition Proposal"). Nothing contained in this
Section 8.05 or any other provision of this Agreement shall prevent the
Board of Directors of Frontier from considering or negotiating an
unsolicited bona fide Acquisition Proposal. If the Board of Directors of
Frontier, after duly considering advice, written or otherwise, of outside
counsel and financial advisors to Frontier, determines in good faith that it
would be consistent with its fiduciary responsibilities to approve or
recommend (and in connection therewith withdraw or modify its approval or
recommendation of this Agreement, and the transactions contemplated hereby
or thereby) a Superior Proposal (as defined below), then, notwithstanding
any such approval or recommendation (x) Frontier shall not enter into any
agreement with respect to the Superior Proposal and (y) any other obligation
of Frontier under this Agreement shall not be affected, unless this
Agreement is terminated pursuant to Section 13.01(f) hereof prior to or
simultaneously with the grant of such approval or the making of such
recommendation. As used herein the term "Superior Proposal" means a bona
fide proposal made by a third party to acquire Frontier pursuant to a tender
or exchange offer, a merger, a sale of all or substantially all of its
assets
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or otherwise that the Board of Directors determines in its good faith judgment
to be more favorable to Frontier's stockholders than the transactions
contemplated by this Agreement (after considering the advice, written or
otherwise, of Frontier's professional advisors).
(b) Frontier shall promptly notify Aspect and Esenjay after receipt of
any formal, informal, written or oral Acquisition Proposal or any request
for nonpublic information relating to Frontier in connection with an
Acquisition Proposal or for access to the properties, books or records of
Frontier that informs the Board of Directors of Frontier that the proposer
is considering making, or has made, an Acquisition Proposal. Such notice to
Aspect and Esenjay shall be made orally and in writing and shall indicate in
reasonable detail the identity of the offeror and the terms and conditions
of such proposal, inquiry or contact.
(c) If the Board of Directors of Frontier receives a request for
material nonpublic information by a person who makes or who states in
writing that it intends, subject to satisfactory review of such nonpublic
information, to make, a bona fide Acquisition Proposal, Frontier may,
subject to the execution of a confidentiality agreement substantially
similar to that then in effect between Frontier, Aspect and Esenjay, provide
such person with access to information regarding Frontier.
(d) Nothing contained in this Section 8.05 shall prevent Frontier from
complying with Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange
Act, if applicable, with regard to an Acquisition Proposal made in the form
of a tender offer by a third party.
8.06 NOTIFICATION OF CERTAIN MATTERS. Each of the parties hereto shall
give prompt notice to the others of (a) any representation or warranty contained
herein and made by such party or parties being untrue or inaccurate when made,
(b) the occurrence of any event or development that would cause (or could
reasonably be expected to cause) any representation or warranty of such party or
parties contained herein to be untrue or inaccurate on the Closing Date, or (c)
any failure of a party or of the parties to comply with or satisfy any covenant,
condition, or agreement to be complied with or satisfied by it or them
hereunder.
8.07 FINANCING COVENANTS.
(a) BRIDGE FINANCING AGREEMENT. As a part of the prior agreements
between the parties, Aspect has committed to loan to Frontier amounts of up
to $1,800,000 which commitment shall survive the execution of this Agreement
and the Closing under this Agreement. The terms and provisions of this
commitment are included in the Bridge Financing Agreement attached as
Exhibit "A" hereto and which shall be referred to herein as the "Initial
Bridge Facility". Aspect shall not be committed or obligated in any manner
to advance more than $1,800,000 under the Initial Bridge Facility or to
otherwise amend or extend the Initial Bridge Facility if Frontier fails to
secure the New Debt (as hereinafter defined) or to complete the Public
Equity Transaction (as hereinafter defined) or for any other reason
whatsoever.
(b) NEW DEBT FINANCING. In addition to the Initial Bridge Facility,
Aspect, Esenjay and Frontier are negotiating with commercial banks and other
independent third parties for a secured, revolving credit facility in
amounts projected to finance certain exploration and 3-D seismic costs,
leasehold acquisition and development of oil and gas properties, and for
general corporate purposes (the "New Debt"). It is contemplated that such
New Debt may be in addition to the Initial Bridge Facility and will be used
in part to provide working capital for Esenjay prior to the Closing Date.
Aspect, Esenjay and Frontier agree to work in conjunction with one another
in order to secure an appropriate commitment or commitments for such New
Debt; provided, however, that no party shall be required to advance any
amounts to any other party in connection with such efforts to secure an
appropriate commitment or commitments. No agreement with respect to the New
Debt shall be entered into without the mutual agreement of the parties
hereto. The New Debt may be structured to include the Initial Bridge
Facility, in which case any advances under the Bridge Financing Agreement
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shall be repaid, and the commitments of Aspect under the Bridge Financing
Agreement terminated, if and only if the New Debt has terms at least as
favorable to Frontier as those under the Bridge Financing Agreement and is
sufficient in amount to cover the working capital expenses of Frontier and
Esenjay through the Closing Date. It is, however, agreed to by each party
hereto that a commitment for the New Debt is not a condition precedent to
funding of the Bridge Financing Agreement or to Closing.
8.08 PUBLIC EQUITY TRANSACTION. The parties acknowledge that Frontier,
following the Closing, intends, to evaluate the public offer and sale of equity
securities of Frontier in a firm-commitment underwritten transaction registered
under the Securities Act and, subject to such evaluation, intends to accomplish
such transaction prior to June of 1998 ("Public Equity Transaction").
8.09 RECONSTITUTED FRONTIER BOARD OF DIRECTORS. The following slate of
individuals shall be nominated to the Board of Directors of Frontier and shall
be vote on pursuant to the Proxy Statement/Prospectus:
(a) For a term expiring at Frontier's annual shareholder meeting in
2000, Alex M. Cranberg, Michael E. Johnson and an independent director.
(b) For a term expiring at Frontier's annual shareholder meeting in
1999, Alex B. Campbell, Charles J. Smith and David W. Berry.
(c) For a term expiring at Frontier's annual shareholder meeting in
1998, Esenjay designee and an independent director.
8.10 MANAGEMENT OF FRONTIER. Immediately after the Closing, the executive
officers of Frontier will be as follows: David W. Berry shall be Chairman of the
Board of Directors, Michael E. Johnson shall be President, Charles J. Smith
shall be Chairman of the Executive Committee of the Board of Directors, Alex M.
Cranberg shall be Vice Chairman of the Board of Directors and Chairman of the
Audit Committee thereof (to be established), and David B. Christofferson shall
be General Counsel and an executive officer with a title to be determined by
Frontier's Board of Directors. Nothing in this Section 8.10 is intended (a) to
prevent the Board of Directors from changing the executive officers of Frontier
from time to time at its discretion or (b) to provide any guarantees or
assurances of continued employment of any of the foregoing individuals by
Frontier.
8.11 REGISTRATION STATEMENT AND PROXY STATEMENT/PROSPECTUS; FRONTIER
STOCKHOLDERS' MEETING.
(a) As promptly as practical, after the execution of this Agreement,
Frontier shall prepare and file with the SEC the Proxy Statement/Prospectus
to be sent to its stockholders in connection with the meeting of Frontier's
stockholders (the "Frontier Stockholders' Meeting") to consider the Exchange
and Frontier shall prepare and file with the SEC the Registration Statement
in which the Proxy Statement/Prospectus will be included as a prospectus.
Frontier shall use all commercially reasonable efforts to cause the
Registration Statement to become effective as soon after such filing as is
practical. The Proxy Statement/Prospectus shall include the recommendation
of the Board of Directors of Frontier in favor of this Agreement and the
Exchange. Frontier shall make all other necessary filings with respect to
the Exchange and the issuance of Frontier Common Stock required under the
Securities Act and the Exchange Act.
(b) Aspect and Esenjay will cooperate in the preparation of the
Registration Statement and the Proxy Statement/Prospectus and will as
promptly as practicable after the date hereof furnish all such data and
information relating to it as Frontier may reasonably request for the
purpose of including such data and information in the Registration Statement
and Proxy Statement/Prospectus. Frontier shall notify Aspect and Esenjay of
the receipt of any comments of the SEC with respect to the Registration
Statement or the Proxy Statement/Prospectus and of any requests by the SEC
for any amendment or supplement thereto or for additional information and
shall provide to the other promptly copies of all correspondence to and from
the SEC with respect to the Registration
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Statement or the Proxy Statement/Prospectus. Frontier shall give Aspect and
Esenjay and their counsel the opportunity to review the Registration
Statement and the Proxy Statement/Prospectus and all responses to requests
for additional information by and replies to comments of the SEC before
their being filed with, or sent to, the SEC. Frontier agrees to use its
commercially reasonable efforts, after consultation with Aspect and Esenjay
to respond promptly to all such comments of and requests by the SEC and to
cause (i) the Registration Statement to be declared effective by the SEC at
the earliest practicable time and to be kept effective for as long as is
necessary to consummate the Exchange, and (ii) the Proxy Statement/
Prospectus to be mailed to the holders of Frontier Common Stock and the
Frontier Preferred Stock entitled to vote at the Frontier Stockholders'
Meeting at the earliest practicable time. No amendment or supplement to the
Registration Statement or the Proxy Statement/Prospectus shall be made by
Frontier without first providing Aspect and Esenjay with reasonable
opportunity to review such amendment or supplement. Frontier shall, within
the confines of its fiduciary and regulatory obligations, use its reasonable
best efforts to incorporate or otherwise address the comments of Aspect
and/or Esenjay after their review of such documents.
(c) Frontier shall, as soon as practicable following effectiveness of
the Registration Statement, take all action necessary under the OGCA and its
Certificate of Incorporation and Bylaws to convene the Frontier
Stockholders' Meeting of its stockholders for the purpose of approving the
Exchange, among other things. Included in the issues required to be approved
by the Shareholders of Frontier shall be (i) closing of the acquisition of
the Aspect Assets, (ii) closing of the acquisition of the Esenjay Assets,
(iii) an amendment to Frontier's Certificate of Incorporation authorizing
the issuance of additional shares of Frontier Common Stock sufficient in
amount to provide Frontier with authorized, but unissued and unreserved,
shares of Frontier Common Stock, adequate to satisfy its obligations under
this Agreement and any contemplated stock issuances under the Public Equity
Transaction, (iv) authorizing the change of Frontier's state of
incorporation from Oklahoma to Delaware, (v) election of the slate of
nominees for the Board of Directors as set forth in Section 8.09 of this
Agreement, and (vi) any other provision hereof its counsel advises Frontier
requires specific approval in order to fully implement the provisions of
this Agreement. Frontier shall use commercially reasonable efforts to cause
the Frontier Stockholders' Meeting to be held as soon as practicable after
the date hereof.
(d) Frontier shall take such action as may be necessary to insure that
(i) the information included in the Registration Statement shall not at the
time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact
required to be stated in the Registration Statement or necessary in order to
make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading, and (ii) the
information included in the Proxy Statement/Prospectus shall not, on the
date the Proxy Statement/Prospectus is first mailed to stockholders of
Frontier, at the time of the Frontier Stockholders' Meeting, and at the
Closing Date, contain any statement which, at such time and in light of the
circumstances under which it shall be made, is false or misleading with
respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement/Prospectus not
false or misleading, or omit to state any material fact necessary to correct
any statement in any earlier communication with respect to the solicitation
of proxies for the Frontier Stockholders' Meeting which has become false or
misleading.
(e) Aspect and Esenjay shall take such action as may be necessary to
insure that any information or data provided by them to Frontier in
connection with the Proxy Statement/Prospectus does not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated in the Proxy
Statement/Prospectus or necessary to make the statements in the Proxy
Statement/Prospectus, in light of the circumstances under which they were made,
not misleading.
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8.12 TAX COOPERATION. Subject to the terms and conditions of this
Agreement, the parties hereto shall cooperate in the preparation, execution and
filing of all returns, questionnaires, applications or other documents regarding
any gains, sales, use, transfer, value added, stock transfer and stamp taxes,
any transfer, recording, registration and other fees, and any similar taxes or
fees which become payable in connection with the Exchange. Each of the parties
shall not take or fail to take any action if such action or omission would cause
any of the parties or their shareholders or members to recognize gain or loss
for federal income tax purposes as a result of the exchange of Frontier Common
Stock for the Esenjay Assets or the Aspect Assets. Aspect and Esenjay shall, and
shall cause their members or shareholders to, reasonably cooperate in the
preparation and delivery to Frontier and its counsel of tax certificates or
similar documents that may be necessary or appropriate in connection with the
preparation of tax opinions or other items regarding the tax matters associated
with this Agreement and the Exchange.
8.13 NAME CHANGE. Within three (3) days of Closing, Frontier shall take
all steps necessary or appropriate to change its name from "Frontier Natural Gas
Corporation" to "Esenjay Resources Corporation" or a similar name as is legally
available and as may be agreed to among the parties hereto prior to Closing and
Esenjay shall consent to the use of such name and execute any documents
reasonably requested by Frontier to evidence such consent. In the event that
Esenjay retains the name "Esenjay Petroleum Corporation," Esenjay agrees not to
assign the rights to such name to any person or entity other than Frontier.
8.14 FRONTIER OWNERSHIP DILUTION.
(a) FRONTIER OPTION PLAN. At or prior to Closing, Frontier shall adopt
a long-term incentive plan for its officers, directors, employees and
consultants that is mutually acceptable to Esenjay, Aspect and Frontier
("Frontier Option Plan"). The Frontier Option Plan shall provide for grants
of stock and stock-oriented awards, including stock options and similar
arrangements with respect to Frontier Common Stock. In addition, the parties
agree initially that an amount equal to approximately fifteen percent (15%)
of the shares of the outstanding Frontier Common Stock after giving effect
to Closing, and any existing Frontier option plans, shall be authorized for
awards under the Frontier Option Plan. The parties agree to seek the
approval of Frontier's shareholders for such incentive plan at Frontier's
next annual shareholders meeting following the Closing.
(b) PUBLIC EQUITY TRANSACTION. The Public Equity Transaction may
dilute the interests of all holders of Frontier Common Stock.
8.15 LIABILITIES AND OBLIGATIONS OF ESENJAY AND ASPECT.
(a) ESENJAY. With respect to the Esenjay Assets, Esenjay agrees to
retain and to release and hold the other parties harmless from all claims,
costs, expenses, liabilities and obligations attributable to the period of
time prior to the Effective Date.
(b) ASPECT. With respect to the Aspect Assets, Aspect agrees to retain
and to release and hold the other parties harmless from all claims, costs,
expenses, liabilities and obligations attributable to the period of time
prior to the Effective Date or, in the case of Post Effective Date Costs,
from the period of time prior to January 1, 1998.
8.16 ESENJAY WIND-DOWN. Subsequent to the closing of the Exchange, Esenjay
shall continue to operate, but shall do so only in a wind-down mode. Esenjay
shall not compete with Frontier in connection with the business of Frontier,
provided, however, Esenjay shall be legally entitled to take all steps
reasonably necessary to maximize the value of the oil and gas properties
retained by Esenjay subsequent to the closing of the Exchange, including, but
not limited to, drilling wells, recompleting existing wells, farming out its
interest and selling oil and natural gas. After the Closing, Esenjay may utilize
the services of Frontier's employees to facilitate its winding down, provided
that such utilization does not interfere with the ability of such employees to
satisfy or complete their duties or responsibilities to Frontier and provided
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further that Esenjay shall reimburse Frontier for such services to the extent
such services exceed $5,000 per month (based upon criteria determined by
Frontier's Board of Directors in its reasonable discretion).
ARTICLE IX
CONDITIONS
9.01 CONDITIONS TO OBLIGATIONS OF ESENJAY AND ASPECT. All obligations of
Esenjay and Aspect at the Closing are subject to the fulfillment of each of the
following conditions precedent at or prior to the Closing, any of which may be
waived in whole or in part by mutual agreement:
(a) REPRESENTATIONS AND WARRANTIES. All representations and warranties
of Esenjay and Frontier, in the case of Aspect, and Aspect and Frontier, in
the case of Esenjay, contained herein or in any document delivered pursuant
hereto which are qualified by materiality thresholds shall be true and
correct in all respects when made and as of the Closing, and the
representations and warranties which are not qualified by materiality
thresholds shall be true and correct in all material respects, except for
the representations and warranties set forth in Section 4.05 which shall be
true and correct in all respects. For purposes of this Section 9.01(a) only,
a representation shall be false or inaccurate if the factual matter that is
the subject of the representation is false or inaccurate notwithstanding any
lack of knowledge of or notice to the warrantor.
(b) COVENANTS, AGREEMENTS AND OBLIGATIONS. All covenants, agreements
and obligations required by the terms of this Agreement to be performed by
Frontier, Esenjay or Aspect at or before the Closing shall have been
properly performed and complied with in all respects.
(c) NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement,
there shall not have occurred any Material Adverse Effect with respect to
(i) Frontier in the case of Aspect and Esenjay, (ii) the Esenjay Assets in
the case of Aspect only, or (iii) the Aspect Assets in the case of Esenjay
only.
(d) DELIVERY OF DOCUMENTS. All documents, certificates or other
instruments required to be delivered to Aspect, Esenjay and Frontier at or
prior to the Closing shall have been so delivered.
(e) BANK OF AMERICA CONSENT. Bank of America Illinois shall have
consented to the Exchange and waived any existing defaults under Frontier's
credit agreement with Bank of America Illinois.
(f) PREFERRED STOCK REDEMPTION. All of the issued and outstanding
Frontier Preferred Stock as of the date hereof shall have been called for
redemption by Frontier and Frontier shall have deposited in an escrow
account funds sufficient to pay the holders of the Frontier Preferred Stock
all amounts such holders are entitled to receive in connection with the
redemption of the Frontier Preferred Stock.
(g) ESENJAY FINANCIAL STATEMENTS. Esenjay shall deliver to Frontier
and Aspect (i) on or before January 31, 1998, financial statements for its
fiscal year ending March 31, 1997 and (ii) on or before February 10, 1998,
financial statements for the nine month period ending December 31, 1997. The
financial statements delivered hereunder shall be unaudited and internally
prepared, but shall be prepared in accordance with GAAP (including any
footnotes required thereby) and shall consist of a balance sheet, a
statement of income, a statement of cash flows and a statement of
shareholders' equity. This condition shall not be a condition of Esenjay to
Closing.
9.02 CONDITIONS TO OBLIGATIONS OF FRONTIER. All obligations of Frontier
hereunder are subject, at the option of Frontier, to the fulfillment of each of
the following conditions precedent at or prior to the Closing, any of which may
be waived in whole or in part by Frontier:
(a) REPRESENTATIONS AND WARRANTIES. All representations and warranties
of Aspect and Esenjay contained herein or in any document delivered pursuant
hereto which are qualified by materiality thresholds shall be true and
correct in all respects when made and as of the Closing, and the
representations and warranties which are not qualified by materiality
thresholds shall be true and
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correct in all material respects. For purposes of this Section 9.02(a) only,
a representation shall be false or inaccurate if the factual matter that is
the subject of the representation is false or inaccurate notwithstanding any
lack of knowledge of or notice to the warrantor.
(b) COVENANTS, AGREEMENTS AND OBLIGATIONS. All covenants, agreements
and obligations required by the terms of this Agreement to be performed by
Aspect or Esenjay at or before the Closing shall have been properly
performed and complied with in all respects.
(c) NO MATERIAL ADVERSE EFFECT. Since the date of this Agreement,
there shall not have occurred any Material Adverse Effect with respect to
the Aspect Assets or to Esenjay or to the Esenjay Assets.
(d) DELIVERY OF DOCUMENTS. All documents, certificates or other
instruments required to be delivered to Frontier at or prior to the Closing
shall have been so delivered.
(e) COMPLIANCE. Aspect shall be in full compliance with its
obligations pursuant to the Bridge Financing Agreement.
(f) ESENJAY FINANCIAL STATEMENTS. Esenjay shall deliver to Frontier
(i) on or before January 31, 1998, financial statements for its fiscal year
ending March 31, 1997 and (ii) on or before February 10, 1998, financial
statements for the nine month period ending December 31, 1997. The financial
statements delivered hereunder shall be unaudited and internally prepared,
but shall be prepared in accordance with GAAP (including any footnotes
required thereby) and shall consist of a balance sheet, a statement of
income, a statement of cash flows and a statement of shareholders' equity.
9.03 CONDITIONS TO OBLIGATIONS OF ALL PARTIES. The respective obligations
of each party are subject to the fulfillment of each of the following conditions
precedent at or prior to the Closing:
(a) SHAREHOLDER APPROVAL. The shareholders of Frontier shall have duly
and validly approved Frontier's execution of this Agreement and the
consummation of the Exchange.
(b) OTHER CONSENTS AND APPROVALS. All consents, approvals, permits and
authorizations required to be obtained prior to the Closing from any
Governmental Authority or other person in connection with the consummation
of the Exchange, and any preferential right to purchase an interest in any
Oil and Gas Interest included in the Aspect Assets or Esenjay Assets as a
result of the Exchange, shall have been obtained, made or waived, except
where such failure to obtain such consents, approvals, permits,
authorizations or waiver would not be reasonably likely to result in a
Material Adverse Effect on Frontier (assuming the Exchange is consummated).
(c) PENDING ACTIONS. None of the parties shall be subject to any writ,
order, decree or injunction of a court of competent jurisdiction which
prohibits or restricts the consummation of the Exchange or any pending or
threatened action seeking such relief or seeking damages as a result
thereof.
(d) OFFICERS OF FRONTIER. Consistent with Section 8.10, the principal
officers of Frontier shall be designated in writing at the Closing to take
office effective immediately after the Closing.
(e) FAIRNESS OPINION. The fairness opinion of GBI described in Article
V hereof, in form and substance satisfactory to counsel for Frontier, shall
have been delivered to Frontier and copies thereof shall be delivered to
Aspect and Esenjay.
(f) OPERATING AGREEMENT. Frontier, Aspect and Esenjay shall approve a
form of operating agreement, mutually acceptable to each of them, that
addresses the operation of the Oil and Gas Interests jointly owned by
Frontier and Aspect and/or Esenjay. Following the Closing, the parties agree
to execute such form of operating agreement in the case of any operations on
such Oil and Gas Interests which are not already subject to an operating
agreement.
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ARTICLE X
DELIVERIES
10.01 DELIVERIES BY FRONTIER. Subject to the written waiver of Aspect and
Esenjay, Frontier shall execute, as appropriate, and deliver at the Closing all
of the following documents and instruments:
(a) stock certificates of Frontier Natural Gas Corporation, in each case
duly endorsed, properly authenticated and in proper form, necessary to issue
to Aspect and Esenjay the shares of Frontier Common Stock issuable pursuant
to this Agreement and the Related Documents;
(b) a certificate dated the Closing Date signed by an appropriate
executive officer of Frontier certifying that, as of the Closing Date, the
representations and warranties of Frontier are accurate, true and correct
with the same force and effect as though made on the Closing Date;
(c) certificates dated the Closing Date signed by an appropriate
executive officer of Frontier certifying, among other things, Frontier's
By-laws and the resolutions of Frontier's Board of Directors and
shareholders approving this Agreement and the Related Documents to which it
is a party and the transactions contemplated hereby and thereby (together
with an incumbency and signature certificate regarding the officer(s)
signing on its behalf);
(d) a copy of Frontier's articles of incorporation which have been filed
with the Secretary of State of its State of incorporation, certified as of a
recent date by the Secretary of State of its State of incorporation;
(e) the Registration Rights Agreement substantially in the form of
Exhibit "B";
(f) a certificate of good standing with respect to Frontier, issued not
earlier than 10 days prior to the Closing Date by the Secretary of State of
its State of incorporation;
(g) an Assignment, Bill of Sale and Conveyance Agreement with respect to
the Aspect Assets substantially in the form of Exhibit "C";
(h) an Assignment, Bill of Sale and Conveyance Agreement with respect to
the Esenjay Assets substantially in the form of Exhibit "D";
(i) the Technical Services Agreements with Esenjay and Aspect, in form
mutually acceptable to the parties thereto;
(j) the Land Consulting Services Agreements with Esenjay and Aspect, in
form mutually acceptable to the parties thereto;
(k) a Section 351 Plan of Exchange, in form and substance mutually
acceptable to the parties hereto;
(l) the written opinion of Porter & Hedges, L.L.P., counsel to Frontier,
substantially in the form of Exhibit "F";
(m) an opinion of Chamberlain, Hrdlicka, White, Williams & Martin, tax
counsel to Frontier (or other counsel to Frontier which is reasonably
acceptable to Aspect and Esenjay), acceptable in form and substance to
counsel for Aspect and Esenjay stating that the Exchange satisfies the
requirements of Section 351 of the Code and will be tax-free to Aspect and
Esenjay;
(n) the written resignation of each member of the Board of Directors of
Frontier, other than David W. Berry;
(o) the fairness opinion of GBI described in Article V hereof;
A-45
<PAGE>
APPENDIX B
C O R N E R S T O N E
------------------------------------------------------------
INVESTMENT BANKERS
6363 Woodway, Suite 970
Houston, Texas 77057-1735
713-952-0186
Fax: 713-952-9861
E-mail: [email protected]
January 23, 1998
David B. Christofferson
Executive Vice President
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, Texas 77002
Re: Valuation of assets to be conveyed to Frontier Natural Gas Corporation by
Esenjay Petroleum Corporation and Aspect Resources, LLC
Dr. Mr. Christofferson:
Frontier Natural Gas Corporation ("Client" or "Company") has requested our
opinion with respect to the fair market value of certain oil and gas assets to
be conveyed to Client by Esenjay Petroleum Corporation ("Esenjay") and Aspect
Resources, LLC ("Aspect") in a transaction that is pending, subject to the
approval of the shareholders of the Company.
As part of its investment banking services, Cornerstone Ventures, L.P.
("Cornerstone") helps clients negotiate mergers, acquisitions and divestitures,
arranges project and corporate financing, and furnishes valuations of
closely-held companies and assets. Cornerstone is registered with the Securities
and Exchange Commission under the Investment Advisors Act of 1940, and with the
Texas State Securities Board. Cornerstone complies with the Uniform Standards of
Professional Appraisal Practice promulgated by the Business Valuation section of
the American Society of Appraisers, and with the stringent standards imposed by
the Internal Revenue Service.
For the purposes of this opinion, "value" means fair market value as that
term is defined by IRS ruling 59-60. This meaning of value is used widely among
buyers, sellers, investors, lenders, and valuation specialists, and is
reinforced by court decisions. A working definition of fair market value is the
price in cash at which a property would change hands between a willing buyer and
a willing seller, with neither party acting under compulsion, and both parties
having reasonable knowledge of relevant facts.
In connection with this opinion, Cornerstone has reviewed the following
information:
- The draft Acquisition Agreement and Plan of Exchange regarding the
transaction.
- Detailed materials prepared by Esenjay and Aspect regarding the oil and
gas properties to be conveyed, including geologic and seismic based maps,
seismic data, lease maps, etc.
- A summary description of as well as summary information regarding each of
the oil and gas properties to be conveyed.
- The QUARTERLY RESERVE REPORT published by Cornerstone setting forth prices
paid per unit in actual purchases and sales of oil and gas interests.
B-1
<PAGE>
David B. Christofferson
January 23, 1998
Page 2
- Cornerstone's proprietary database containing information regarding actual
purchases and sales of oil and gas interests, including information on
recent transactions in the Company's areas of exploration and production.
- Published data concerning historical and projected oil and gas prices in
the United States.
In addition, Cornerstone attended meetings in the offices of Esenjay and
Aspect to review the detailed data discussed above and to hear presentations by,
and ask questions of, the technical people involved with each specific property
to be conveyed.
In preparing this opinion, Cornerstone has relied upon the accuracy and
completeness of, and has not independently verified (other than employing its
own appropriate internal tests of reasonableness and consistency and
participating in the meetings described above) the business, financial,
geological, geophysical, engineering and other information supplied regarding
this assignment.
In formulating our opinion, Cornerstone also considered many factors
including, but not limited to, the following:
- In all valuations of oil and gas interests, Cornerstone uses more than one
approach to arrive at an estimate that, because it is tested (compared)
against other estimates, is more reliable than any estimate based upon a
single approach. For properties that currently are producing, the most
widely used methodology is discounted future net revenues derived from a
comprehensive technical assessment of future production and reserves. In
this case, because the properties currently are not producing, Cornerstone
utilized prices paid in other comparable transactions as a proxy.
- Calculations of estimated value were made on the basis of risk adjusted
reserves (derived from a comprehensive technical assessment).
Additionally, calculations were made of the estimated replacement costs
that a buyer would have to incur to bring the individual properties to
their current state of development. Both these calculations then were
compared to actual transactions, the details of which Cornerstone has in
its proprietary data base.
- The market supply/demand environment for oil and gas reserves and
exploration prospects in the United States, that has the characteristics
generally reflective of a seller's market, was considered.
- The current commodity price environment was considered. Such price
environment has short-term volatility generally and particularly for gas,
which adds an extra element of risk to oil and gas reserve transactions,
but that is perceived by the market to be somewhat stable over the long
term at levels somewhat above current prices.
- Another relevant factor is the current active drilling environment for oil
and gas and its effect on the value of properties in the regions where the
oil and gas properties to be conveyed to the Company exist.
Schedule 1 reflects a tabulation of certain data concerning each of the
twenty-nine (29) properties to be conveyed to the Company from Esenjay and
Aspect. The first column of numbers reflects estimates of the total reserves, in
natural gas equivalent quantities (Bcfe), that can reasonably be expected to be
developed in each property. Esenjay and Aspect each had prepared estimates of
the potential reserves that they felt possibly could be found for each property.
After reviewing the data presented by each company and hearing a presentation as
to the stage of exploration and/or exploitation of each property, Cornerstone
made adjustments to the reserve estimates where appropriate to reflect what it
felt could reasonably be categorized as Possible Reserves in accordance with the
definition of the Society of Petroleum Engineers ("SPE"). The gross reserve
numbers reflected in the first column represents 100% of the possible reserves
B-2
<PAGE>
David B. Christofferson
January 23, 1998
Page 3
for each property. It can be seen that the total reserves associated with these
properties is approximately 2.8 Tcfe. The next two (2) columns reflect, by
seller, the working interests in each property that is to be conveyed to the
Company. The next two (2) columns reflect, again by seller, the net working
interest reserves to be conveyed to the Company and was determined by
multiplying the gross reserves by the working interest to be conveyed. It can be
seen that the total working interest reserves to be conveyed to the Company is
approximately 1.0 Tcfe, comprised of 468 Bcfe from Aspect and 576 Bcfe from
Esenjay.
For purposes of valuation, each category of reserves defined by the SPE are
risked. The Society of Petroleum Evaluation Engineers ("SPEE") each year
tabulates the levels of risk that are used by its members for the purpose of
valuing oil and gas properties. The latest survey of the SPEE indicates that the
average risk factor used for reserves categorized as possible is 6%, i.e., the
estimated possible reserves would be multiplied by 6% to arrive at an expected
reserve. Based on Cornerstone's QUARTERLY RESERVE REPORT and its proprietary
data base, the average value in the market place for proved reserves is
approximately $.85/Mcfe. If the 6% risk factor is multiplied by the average
reserve value of $.85/Mcfe, the result is that possible reserves would have a
fair market value of approximately $.05/mcfe. Cornerstone has proprietary data
that confirms that exploration properties of the quality and type to be conveyed
to the Company, in fact, have recently sold in the marketplace at approximately
the level of $.05/Mcfe of possible reserves.
The last series of columns on Schedule 1 reflect the estimates of the fair
market value of the reserves to be conveyed to the Company. It can be seen that
the total value of such properties is approximately $54.5 million, broken down
as $25.7 million to be conveyed from Aspect and $28.8 million from Esenjay.
As a test of reasonableness of the above described reserve-based estimates,
Cornerstone also undertook a series of calculations that are reflected on
Schedule 2. Based on Cornerstone's investment banking experience in transactions
that have taken place recently and its proprietary data base, a mathematical
relationship can be said to exist between the fair market value of a group of
properties of the quality and type to be conveyed to the Company and the
approximate replacement cost for a buyer to acquire the land position and
seismic data associated with such a group of properties, e.g., replacement
costs. Overall, we have found that the fair market value of such properties
ranges from 1.7 to 2.0 times their replacement costs.
In Schedule 2, the first column, again, reflects the working interests to be
conveyed to the Company. The second column reflects the gross acres associated
with the land position. It can be seen that the gross acreage involved is
approximately 294,000 acres. The next column reflects net acres to be conveyed
(gross multiplied by the working interest). It can be seen that the net acres to
be conveyed to the Company amounts to approximately 133,000 acres. The next
column reflects Cornerstone's estimate of the average cost to acquire such
acreage. The next column reflects the estimated replacement cost associated with
the acreage to be conveyed to the Company (acreage cost multiplied by the net
acreage). It can be seen that the estimated replacement costs associated with
the acreage position to be conveyed to the Company is approximately $16.6
million.
As to seismic data, the next two columns reflect the gross amount of seismic
assets in square miles to be conveyed to the Company that is associated with
each property. These seismic projects are in various stages of development
completion. Some seismic data have been acquired and fully interpreted, others
have yet to be acquired, but have been or are in the process of being designed.
Cornerstone has estimated the unit costs (per square mile) to bring these
projects to their current stage of development, which is reflected in the next
two columns. We then multiplied the gross square miles associated with each
project, times the working interest to be conveyed, times the unit cost to
arrive at each property's estimated net
B-3
<PAGE>
David B. Christofferson
January 23, 1998
Page 4
seismic replacement cost. The total estimated replacement cost associated with
these seismic projects is $10.2 million. The last column reflects the sum of the
estimated land and seismic replacement costs for each property. The aggregate
replacement cost for these assets is approximately $26.8 million.
The calculated reserve-based fair market value of the properties is
approximately 2.0 times the aggregate estimated replacement cost associated with
them. This ratio is within the range of relational values that have occurred in
actual transactions.
For the reasons explained above, it is Cornerstone's opinion that the
estimated fair market value of the properties to be conveyed to the Company is
$54.5 million, broken down between Aspect and Esenjay as $25.7 million and $28.8
million, respectively. The estimated fair market value of each property to be
conveyed is reflected in the last column of Schedule 1.
Cornerstone was compensated for this assignment in accordance with its
regular compensation schedule. There is no relationship between Cornerstone and
the Client that would impair the objectivity of this opinion. Compensation for
this opinion was independent of the conclusions reached.
CORNERSTONE VENTURES, L.P.
/s/ CORNERSTONE VENTURES, L.P.
--------------------------------------
Cornerstone Ventures, L.P.
B-4
<PAGE>
SCHEDULE 1
FRONTIER NATURAL GAS
CORPORATION
PROPERTY VALUATION
RESERVE BASED VALUE
<TABLE>
<CAPTION>
UNRISKED RESERVES
--------------------
GROSS ASPECT ESENJAY FRONTIER ASPECT ESENJAY FRONTIER TOTAL
PROPERTY RESERVES W.I. W.I. W.I. RESERVES RESERVES RESERVES RESERVES
- ------------------------------ ----------- ----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gillock....................... 250 22.50% 0.00% 0.00% 56 0 0 56
Caney Creek................... 250 12.50% 0.00% 0.00% 31 0 0 31
Tidehaven..................... 140 12.50% 28.00% 0.00% 18 39 0 57
El Maton...................... 90 12.50% 34.00% 0.00% 11 31 0 42
Midfield...................... 50 12.50% 25.00% 0.00% 6 13 0 19
Wolfpoint..................... 50 12.50% 33.00% 0.00% 6 17 0 23
Hall Ranch.................... 325 12.50% 29.00% 0.00% 41 94 0 135
Hoards Creek.................. 120 12.50% 29.00% 0.00% 15 35 0 50
Mikeska....................... 250 12.50% 25.50% 0.00% 31 64 0 95
Pile Driver................... 10 12.50% 50.00% 0.00% 1 5 0 6
Houston Endowment............. 100 7.00% 20.00% 0.00% 7 20 0 27
Lipsmacker.................... 10 7.00% 15.00% 0.00% 1 2 0 2
Blessing...................... 50 7.00% 17.00% 0.00% 4 9 0 12
South Raymondville............ 150 22.00% 57.00% 0.00% 33 86 0 119
Geronimo...................... 200 0.00% 20.00% 0.00% 0 40 0 40
Thompson Creek................ 100 0.00% 56.00% 0.00% 0 56 0 56
La Rosa....................... 40 0.00% 8.00% 0.00% 0 3 0 3
Sheriff....................... 35 75.00% 0.00% 0.00% 26 0 0 26
S.W. Pheasant................. 10 75.00% 0.00% 0.00% 8 0 0 8
Lovell Lake................... 150 50.00% 0.00% 0.00% 75 0 0 75
Stowell/Big Hill.............. 75 50.00% 0.00% 0.00% 38 0 0 38
Bauer Ranch................... 60 45.00% 0.00% 0.00% 27 0 0 27
W. Beaumont................... 100 6.25% 0.00% 0.00% 6 0 0 6
Lox B......................... 80 25.00% 0.00% 0.00% 20 0 0 20
West Port Acres............... 30 25.00% 0.00% 0.00% 8 0 0 8
East Texas.................... 0 0.00% 0.00% 0.00% 0 0 0 0
Buckeye....................... 40 0.00% 74.00% 0.00% 0 30 0 30
Hagist Ranch.................. 10 0.00% 90.00% 0.00% 0 9 0 9
Duncan Slough................. 40 0.00% 66.00% 0.00% 0 26 0 26
Crab Lake..................... 40 0.00% 0.00% 75.00% 0 0 30 30
Lapeyrouse.................... 400 0.00% 0.00% 45.00% 0 0 180 180
Total......................... 3,255 468 576 210 1,254
<CAPTION>
ASPECT ESENJAY FRONTIER TOTAL
PROPERTY VALUE VALUE VALUE VALUE
- ------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gillock....................... $ 2,812,500 $ 0 $ 0 $ 2,812,500
Caney Creek................... $ 1,562,500 $ 0 $ 0 $ 1,562,500
Tidehaven..................... $ 875,000 $ 1,960,000 $ 0 $ 2,835,000
El Maton...................... $ 562,500 $ 1,530,000 $ 0 $ 2,092,500
Midfield...................... $ 312,500 $ 625,000 $ 0 $ 937,500
Wolfpoint..................... $ 312,500 $ 825,000 $ 0 $ 1,137,500
Hall Ranch.................... $ 2,031,250 $ 4,712,500 $ 0 $ 6,743,750
Hoards Creek.................. $ 750,000 $ 1,740,000 $ 0 $ 2,490,000
Mikeska....................... $ 1,562,500 $ 3,187,500 $ 0 $ 4,750,000
Pile Driver................... $ 62,500 $ 250,000 $ 0 $ 312,500
Houston Endowment............. $ 350,000 $ 1,000,000 $ 0 $ 1,350,000
Lipsmacker.................... $ 35,000 $ 75,000 $ 0 $ 110,000
Blessing...................... $ 175,000 $ 425,000 $ 0 $ 600,000
South Raymondville............ $ 1,650,000 $ 4,275,000 $ 0 $ 5,925,000
Geronimo...................... $ 0 $ 2,000,000 $ 0 $ 2,000,000
Thompson Creek................ $ 0 $ 2,800,000 $ 0 $ 2,800,000
La Rosa....................... $ 0 $ 160,000 $ 0 $ 160,000
Sheriff....................... $ 1,312,500 $ 0 $ 0 $ 1,312,500
S.W. Pheasant................. $ 375,000 $ 0 $ 0 $ 375,000
Lovell Lake................... $ 3,750,000 $ 0 $ 0 $ 3,750,000
Stowell/Big Hill.............. $ 1,875,000 $ 0 $ 0 $ 1,875,000
Bauer Ranch................... $ 1,350,000 $ 0 $ 0 $ 1,350,000
W. Beaumont................... $ 312,500 $ 0 $ 0 $ 312,500
Lox B......................... $ 1,000,000 $ 0 $ 0 $ 1,000,000
West Port Acres............... $ 375,000 $ 0 $ 0 $ 375,000
East Texas.................... $ 2,000,000 $ 0 $ 0 $ 2,000,000
Buckeye....................... $ 0 $ 1,480,000 $ 0 $ 1,480,000
Hagist Ranch.................. $ 0 $ 450,000 $ 0 $ 450,000
Duncan Slough................. $ 0 $ 1,320,000 $ 0 $ 1,320,000
Crab Lake..................... $ 0 $ 0 $ 1,500,000 $ 1,500,000
Lapeyrouse.................... $ 0 $ 0 $ 9,000,000 $ 9,000,000
Total......................... $ 25,403,750 $ 28,815,000 $ 10,500,000 $ 64,718,750
</TABLE>
B-5
<PAGE>
SCHEDULE 2
FRONTIER NATURAL GAS CORPORATION
PROPERTY VALUATION
REPLACEMENT COST ESTIMATE
<TABLE>
<CAPTION>
TOTAL GROSS NET COST ACREAGE EXISTING PLANNED COST COST
PROPERTY W.I. ACRES ACRES PER ACRE COST SEISMIC SEISMIC EXISTING PLANNED
- ------------------------- --------- --------- --------- --------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gillock.................. 22.50% 24,693 5,556 $ 250 $ 1,388,981 0 65 $ 45,000 $ 5,000
Caney Creek.............. 12.50% 20,911 2,614 $ 200 $ 522,775 34 $ 45,000 $ 5,000
Tidehaven................ 40.50% 4,500 1,823 $ 200 $ 364,500 28 $ 45,000 $ 5,000
El Maton................. 46.50% 7,000 3,255 $ 200 $ 651,000 38 $ 45,000 $ 5,000
Midfield................. 37.50% 4,000 1,500 $ 200 $ 300,000 21 $ 45,000 $ 5,000
Wolfpoint................ 45.50% 1,200 546 $ 250 $ 136,500 8 $ 45,000 $ 5,000
Hall Ranch............... 41.50% 8,300 3,445 $ 150 $ 516,675 57 $ 45,000 $ 5,000
Hoards Creek............. 41.50% 10,000 4,150 $ 150 $ 622,500 30 $ 45,000 $ 5,000
Mikeska.................. 38.00% 8,000 3,040 $ 250 $ 760,000 31 $ 45,000 $ 5,000
Pile Driver.............. 62.50% 640 400 $ 200 $ 80,000 2 $ 45,000 $ 5,000
Houston Endowment........ 27.00% 11,000 2,970 $ 200 $ 594,000 50 $ 45,000 $ 5,000
Lipsmacker............... 22.00% 4,000 880 $ 100 $ 88,000 7 $ 45,000 $ 5,000
Blessing................. 24.00% 10,000 2,400 $ 150 $ 360,000 22 $ 45,000 $ 5,000
South Raymondville....... 79.00% 10,000 7,900 $ 200 $ 1,580,000 60 $ 45,000 $ 5,000
Geronimo................. 20.00% 7,000 1,400 $ 200 $ 280,000 72 $ 45,000 $ 5,000
Thompson Creek........... 56.00% 2,000 1,120 $ 250 $ 280,000 10 2 $ 45,000 $ 5,000
La Rosa.................. 8.00% 5,000 400 $ 150 $ 60,000 25 $ 45,000 $ 5,000
Sheriff.................. 75.00% 54,084 40,563 $ 25 $ 1,014,075 72 $ 45,000 $ 5,000
S.W. Pheasant............ 75.00% 10,139 7,604 $ 200 $ 1,520,850 10 $ 45,000 $ 5,000
Lovell Lake.............. 50.00% 23,543 11,772 $ 150 $ 1,765,725 100 $ 45,000 $ 5,000
Stowell/Big Hill......... 50.00% 11,745 5,873 $ 150 $ 880,875 56 $ 45,000 $ 5,000
Bauer Ranch.............. 45.00% 13,494 6,072 $ 150 $ 910,845 60 $ 45,000 $ 5,000
W. Beaumont.............. 6.25% 11,264 704 $ 150 $ 105,600 22 $ 45,000 $ 5,000
Lox B.................... 25.00% 11,681 2,920 $ 150 $ 438,038 71 $ 45,000 $ 5,000
West Port Acres.......... 25.00% 753 188 $ 150 $ 28,238 21 $ 45,000 $ 5,000
East Texas............... 0.00% 0 0 $ 0 $ 0 400 $ 45,000 $ 5,000
Buckeye.................. 74.00% 8,500 6,290 $ 150 $ 943,500 50 $ 45,000 $ 5,000
Hagist Ranch............. 90.00% 2,000 1,800 $ 50 $ 90,000 0 15 $ 45,000 $ 5,000
Duncan Slough............ 66.00% 8,500 5,610 $ 50 $ 280,500 60 $ 45,000 $ 5,000
Crab Lake................ 75.00% 500 375 $ 350 $ 131,250 12 0 $ 110,000 $ 5,000
Lapeyrouse............... 45.00% 8,900 4,005 $ 350 $ 1,401,750 35 0 $ 110,000 $ 5,000
Total.................... 303,347 137,174 $ 18,096,176 662 884
<CAPTION>
SEISMIC TOTAL
PROPERTY COST COST
- ------------------------- ------------ ------------
<S> <C> <C>
Gillock.................. $ 73,125 $ 1,462,106
Caney Creek.............. $ 191,250 $ 714,025
Tidehaven................ $ 510,300 $ 874,800
El Maton................. $ 795,150 $ 1,446,150
Midfield................. $ 354,375 $ 654,375
Wolfpoint................ $ 163,800 $ 300,300
Hall Ranch............... $ 1,064,475 $ 1,581,150
Hoards Creek............. $ 560,250 $ 1,182,750
Mikeska.................. $ 530,100 $ 1,290,100
Pile Driver.............. $ 56,250 $ 136,250
Houston Endowment........ $ 607,500 $ 1,201,500
Lipsmacker............... $ 69,300 $ 157,300
Blessing................. $ 237,600 $ 597,600
South Raymondville....... $ 237,000 $ 1,817,000
Geronimo................. $ 648,000 $ 928,000
Thompson Creek........... $ 257,600 $ 537,600
La Rosa.................. $ 90,000 $ 150,000
Sheriff.................. $ 270,000 $ 1,284,075
S.W. Pheasant............ $ 337,500 $ 1,858,350
Lovell Lake.............. $ 250,000 $ 2,015,725
Stowell/Big Hill......... $ 1,260,000 $ 2,140,875
Bauer Ranch.............. $ 135,000 $ 1,045,845
W. Beaumont.............. $ 61,875 $ 167,475
Lox B.................... $ 798,750 $ 1,236,788
West Port Acres.......... $ 236,250 $ 264,488
East Texas............... $ 0 $ 0
Buckeye.................. $ 185,000 $ 1,128,500
Hagist Ranch............. $ 67,500 $ 157,500
Duncan Slough............ $ 198,000 $ 478,500
Crab Lake................ $ 990,000 $ 1,121,250
Lapeyrouse............... $ 1,732,500 $ 3,134,250
Total.................... $ 12,968,450 $ 31,064,626
</TABLE>
B-6
<PAGE>
APPENDIX C
GAINES, BERLAND, INC.
FEBRUARY 10, 1998
CONFIDENTIAL
Board of Directors
Frontier Natural Gas Corporation
500 Dallas Street - Suite 2920
Houston, TX 77002
Gentlemen:
Gaines, Berland Inc. ("GBI") understands that Frontier Natural Gas
Corporation, an Oklahoma corporation ("Frontier" or the "Company"), has entered
into an Acquisition Agreement and Plan of Exchange substantially in the form
delivered to us on January 19, 1998 (the "Acquisition Agreement") with Esenjay
Petroleum Corporation, a Texas corporation, ("Esenjay") and Aspect Resources,
LLC, a Colorado limited liability company ("Aspect"). As stated in the
Agreement, the Company has agreed to acquire certain assets from Esenjay and
Aspect (or its affiliates or assigns) (the "Acquisitions") in exchange for
shares of the Company's common stock ("Common Stock"). At closing, the Company
will issue to Esenjay 30,991,563 shares of Common Stock in exchange for the
Esenjay assets and 29,648,636 shares of Common Stock to Aspect (or its
affiliates or assigns) in exchange for the Aspect assets, (collectively, the
"Consideration").
The Acquisitions are expected to be considered by the shareholders of the
Company at a special meeting of the shareholders and to be consummated on or
shortly after the date of such meeting.
You have asked for GBI's opinion, as investment bankers, as to whether the
Consideration to be paid to Esenjay and Aspect (or its affiliates or assigns) by
Frontier pursuant to the Acquisition Agreement is fair to the Frontier
shareholders from a financial point of view.
Gaines, Berland Inc., as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to the Board of Directors of Frontier in connection with the
Acquisitions and will receive fees for such services and the delivery of this
opinion.
In arriving at the opinion set forth below, GBI reviewed such information
and considered such financial data and other factors as GBI deemed relevant
under the circumstances, including among others, the following: (i) the terms
and conditions of the Acquisition Agreement, (ii) the historical and current
financial condition and results of operations of the Company; (iii) certain
non-public financial and non-financial information prepared by the respective
managements of the Company, Esenjay and Aspect, which data was made available to
GBI in its role as financial advisor to the Company; (iv) published information
regarding the financial performance and operating characteristics of a selected
group of companies that GBI deemed comparable; (v) business prospects of the
Company when taking into consideration the impact of the Acquisitions; (vi) the
historical and current market prices for the Company's Common Stock and for the
equity securities of certain other companies with businesses that GBI considered
relevant to its inquiry; (vii) publicly available information, including
research reports on companies that GBI considered relevant to its inquiry; and
(viii) the nature and terms of other recent acquisition transactions in the
onshore exploration and drilling industry. GBI also met with certain officers
and employees of the Company, Esenjay and Aspect to discuss the foregoing, as
well as other matters believed relevant to its opinion.
C-1
<PAGE>
Frontier Natural Gas Corporation
February 10, 1998
Page 2
In addition, GBI relied on the opinion of Cornerstone Ventures L.P.
("Cornerstone"), which independently determined the fair market value of certain
oil and gas assets currently owned by Frontier, as well as the fair market value
of the Esenjay assets and Aspect assets to be conveyed to Frontier upon
consummation of this transaction. The Cornerstone opinion is included as Exhibit
A.
In its review and analysis and in rendering its opinion, GBI assumed and
relied upon the accuracy and completeness of the representations and warranties
made by the Company, Esenjay and Aspect in the Acquisition Agreement, as well as
all of the financial and other information provided to it by the Company's
management or publicly available, including without limitation, information with
respect to tax positions, contingent liabilities, condition of assets and
material contract terms, and GBI did not assume any responsibility for the
independent verification of such information. GBI did not conduct a physical
inspection of any of the properties or facilities of the Company, Esenjay or
Aspect. In preparing its opinion, GBI did not independently verify the business,
financial, geological, geophysical, engineering and other information supplied
regarding Frontier, Esenjay and Aspect.
GBI's opinion was necessarily based upon information available to GBI, and
economic, financial, market and other conditions as they existed and could be
evaluated on the date of the opinion. Although subsequent developments may
affect its opinion, GBI does not have any obligation to update, revise or
reaffirm its opinion.
GBI's opinion was delivered for the information of the Company's Board of
Directors and does not constitute a recommendation to any shareholder of
Frontier as to how such shareholder should vote at the Frontier Special Meeting
of Shareholders. Further, GBI's opinion addresses only the fairness from a
financial point of view of the consideration to be paid to Esenjay and Aspect
pursuant to the Acquisition Agreement and does not address any other terms of
the Acquisitions or the Company's underlying business decision to effect the
Acquisitions.
It is understood that this letter is for the information of the Board of
Directors of Frontier in connection with its evaluation of the fairness to
Frontier shareholders, from a financial point of view, as of the date hereof, of
the Consideration to be paid pursuant to the Acquisition Agreement to Esenjay
and Aspect by Frontier. Without limiting the foregoing, in rendering this
opinion, GBI has not been engaged to act as an agent or fiduciary for Frontier's
shareholders or any other third party.
Based on and subject to the foregoing, we are of the opinion that the
Consideration to be paid to Esenjay and Aspect pursuant to the Acquisition
Agreement is fair to Frontier shareholders from a financial point of view.
<TABLE>
<S> <C> <C>
Very truly yours,
GAINES, BERLAND INC.
By: /s/ PETER H. BLUM
-----------------------------------------
Peter H. Blum
SENIOR MANAGING DIRECTOR
</TABLE>
C-2
<PAGE>
APPENDIX D
May , 1998
Esenjay Petroleum Corporation
500 N. Water St., Suite 1100 South
Corpus Christie, Texas 78471
Aspect Resources LLC
511 16th Street, Suite 300
Denver, Colorado 80202
Gentlemen:
This letter states our opinion regarding the material federal income tax
consequences arising from the acquisition of certain property by Frontier
Natural Gas Corporation ("FRONTIER") from Esenjay Petroleum Corporation
("ESENJAY") and Aspect Resources LLC ("ASPECT") pursuant to the Acquisition
Agreement and Plan of Exchange dated effective as of January 19, 1998 by and
among Frontier, Esenjay, and Aspect (the "ACQUISITION AGREEMENT").
The transactions that are the subject of the Acquisition Agreement,
including any transactions undertaken pursuant to Section 3.02(f) of the
Acquisition Agreement, are collectively referred to as the "ACQUISITIONS" for
purposes of this letter. The terms of the Acquisitions are set forth in the
Acquisition Agreement and described in the Registration Statement filed on Form
S-4 by the Company with the Securities and Exchange Commission on February __,
1998 (the "REGISTRATION STATEMENT"). All capitalized terms used but not defined
in this letter have the same meanings given to them in the Acquisition
Agreement.
Our conclusions are based solely on the U.S. federal income tax laws. We are
not hereby addressing any other legal consequences arising under federal, state,
local, foreign or other law. We have examined such documents, corporate records,
and certificates (copies of which are attached; collectively, the
"CERTIFICATES") as we have considered necessary or appropriate for purposes of
rendering our opinion, including the Acquisition Agreement and the Registration
Statement. For purposes of such examination, we have assumed the authenticity of
all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified or photostatic copies (and the
authenticity of the originals of such documents), the genuineness of all
signatures, and the legal capacity of all natural persons.
In rendering our opinion, we have relied upon the accuracy and completeness
of the facts, information, covenants and representations contained in the
documents and corporate records referenced above, including the Acquisition
Agreement, Registration Statement, and Certificates. Our opinion is conditioned
on the initial and continuing accuracy of the facts, information, covenants and
representations set forth in such documents and corporate records. Additionally,
we have assumed for purposes of rendering our opinion that the Acquisitions are
consummated in accordance with the terms and conditions of the Acquisition
Agreement.
Based solely upon and subject to the foregoing, we are of the opinion that:
1. The Acquisitions will satisfy the requirements of section 351 of
the Internal Revenue Code of 1986, as amended (the "CODE").
2. Frontier will not recognize any gain (or loss) in connection with
the issuance of shares of Frontier Common Stock as part of the
Acquisitions.
D-1
<PAGE>
Esenjay Petroleum Corporation
Aspect Resources LLC
May , 1998
Page 2
3. Esenjay and Aspect will not recognize any gain (or loss) from the
transfer of the Esenjay Assets and Aspect Assets respectively to Frontier
as part of the Acquisitions solely to the extent that Esenjay and Aspect
receive shares of Frontier Common Stock in exchange for such assets.
4. The adjusted basis that Frontier will obtain in the Esenjay
Assets and Aspect Assets will be equal to the adjusted basis that Esenjay
and Aspect respectively had in the Esenjay Assets and Aspect Assets
immediately prior to the Acquisitions, increased by the amount of gain,
if any, that Esenjay or Aspect respectively is required to recognize in
connection with the Acquisitions.
5. The adjusted basis that Esenjay and Aspect will obtain in the
Frontier Common Stock that they receive as part of the Acquisitions will
be equal to the adjusted basis that they had immediately prior to the
Acquisitions in the Esenjay Assets and Aspect Assets respectively,
increased by the amount of gain, if any, that they are required to
recognize respectively in connection with the Acquisitions, reduced by
the amount of money and the fair market value of any other boot that they
receive respectively as part of the Acquisitions, reduced by the amount
of the liabilities, if any, assumed from them respectively by Frontier as
part of the Acquisitions, and reduced by the amount of the liabilities,
if any, encumbering the Esenjay Assets and Aspect Assets respectively at
the time acquired by Frontier as part of the Acquisitions.
6. The holding period that the Company will have in the Esenjay
Assets and Aspect Assets will include the holding period during which
Esenjay and Aspect respectively held the Esenjay Assets and Aspect Assets
prior to the Acquisitions.
7. The holding period that Esenjay and Aspect will have in the
Frontier Common Stock that they receive as part of the Acquisitions will
include the holding period prior to the Acquisitions during which they
held the Esenjay Assets and Aspect Assets respectively, but only to the
extent that the items of property comprising the Esenjay Assets and
Aspect Assets constituted either capital assets or property described in
section 1231 of the Code on the date of the Acquisitions.
The opinions that we state in this letter represent our best legal judgment.
However, they have no binding effect or official status of any kind. It is
possible that the Internal Revenue Service ("IRS") will disagree with all, or
some, of our conclusions. The opinions are based upon existing provisions of the
Code, the applicable Treasury Department regulations promulgated thereunder,
published rulings, procedures, and pronouncements of the IRS which are
authority, applicable legislative history, and judicial decisions. All such
authorities are subject to change at any time, either prospectively or
retroactively, and any such change could modify the opinions stated in this
letter. In rendering our opinions, we undertake no responsibility to advise you
of any such change in the federal income tax laws. The opinions may not be
relied upon to the extent that there is any such change in the federal income
tax laws that relate to the transactions that are the subject of this letter.
Our opinions address only the matters expressly set forth in this letter,
and no opinion is to be implied or inferred except as expressly stated in this
letter. The opinions stated in this letter are stated and effective as of the
Closing Date. This letter is solely for the benefit of Esenjay Petroleum
Corporation and Aspect
D-2
<PAGE>
Esenjay Petroleum Corporation
Aspect Resources LLC
May , 1998
Page 3
Resources LLC, and may not be relied upon by any other person without in each
instance our prior written consent. This opinion may be filed as an exhibit to
the Registration Statement.
<TABLE>
<S> <C> <C>
Sincerely,
CHAMBERLAIN, HRDLICKA, WHITE, WILLIAMS & MARTIN
</TABLE>
D-3
<PAGE>
APPENDIX E
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
FRONTIER NATURAL GAS CORPORATION
The undersigned Oklahoma corporation, for the purposes of amending its
Certificate of Incorporation as provided in section 1077 of the Oklahoma General
Corporation Act, hereby certifies:
1. The name of the corporation is Frontier Natural Gas Corporation (the
"Corporation").
2. Article V of the Certificate of Incorporation of the Corporation is
amended to read in its entirety as follows:
"Each six shares of the Company's Common Stock, par value $.01 per
share, issued as of the date and time immediately preceding [insert date
which amended certificate is filed], the effective date of a reverse
stock split (the "Split Effective Date") shall be automatically changed
and reclassified, as of the Split Effective Date and without further
action, into one fully paid and nonassessable share of the Company's
Common Stock, par value $.01 per share; PROVIDED, HOWEVER, that any
fractional interests resulting from such change in classification shall
be rounded upward to the next whole share."
3. At a meeting of the Board of Directors, a resolution was duly
adopted setting forth proposed amendments to the Certificate of
Incorporation of the Corporation, declaring said amendments to be advisable
and calling a meeting of the shareholders of the Corporation for
consideration thereof. Thereafter, pursuant to said resolution of its Board
of Directors, a meeting of the shareholders of the Corporation was duly
called and held, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendments.
SUCH AMENDMENT(S) WAS DULY ADOPTED IN ACCORDANCE WITH 18 O.S., Section 1077.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Amendment
to be signed by Michael E. Johnson, its President and attested by David B.
Christofferson, its Secretary, this day of , 1998.
FRONTIER NATURAL GAS CORPORATION
By:
____________________________________
Michael E. Johnson, PRESIDENT
ATTEST:
____________________________________
David B. Christofferson, SECRETARY
E-1
<PAGE>
<TABLE>
<S> <C>
STATE OF TEXAS
COUNTY OF HARRIS
</TABLE>
BEFORE ME personally appeared Michael E. Johnson, known to me or proved to
me on the basis of satisfactory evidence to be the person whose name is
subscribed to the foregoing instrument, and known to me to be the President of
Frontier Natural Gas Corporation, an Oklahoma corporation, and acknowledged to
me that he executed said instrument for the purposes and consideration therein
expressed, and as the act of said corporation and declared that the statements
therein contained are true.
WITNESS my hand and official seal this day of , 1998.
________________________________________
NOTARY PUBLIC IN AND FOR THE
STATE OF TEXAS
________________________________________
NOTARY PUBLIC PRINTED NAME
MY COMMISSION EXPIRES: ____________
E-2
<PAGE>
APPENDIX F
PLAN AND AGREEMENT OF MERGER
REINCORPORATION OF FRONTIER NATURAL GAS CORPORATION
IN DELAWARE
PLAN AND AGREEMENT OF MERGER, dated as of , 1998, by and between
Esenjay Exploration, Inc., a Delaware corporation ("Newco" or the "Surviving
Corporation"), and Frontier Natural Gas Corporation, an Oklahoma corporation
("Frontier"). Frontier and Newco are hereinafter collectively referred to as the
"Merging Corporations."
W I T N E S S E T H:
WHEREAS, Newco is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at 1209 Orange
Street, Wilmington, Delaware 19801, and with its principal executive offices at
One Allen Center, Suite 2920, Houston, Texas 77002;
WHEREAS, the authorized capital stock of Newco consists of 40,000,000 shares
of common stock, par value $.01 per share ("Newco Common Stock"), and 5,000,000
shares of preferred stock, par value $.01 per share, of which, as of the date
hereof, ten shares of Newco Common Stock were issued and outstanding and owned
by Frontier;
WHEREAS, Frontier is a corporation duly organized and validly existing under
the laws of the State of Oklahoma, with its registered office at 735 First
National Building, Oklahoma City, Oklahoma 73102, and with its principal
executive offices at One Allen Center, Suite 2920, Houston, Texas 77002;
WHEREAS, the authorized capital stock of Frontier consists of 40,000,000
shares of common stock, par value $.01 per share ("Frontier Common Stock"), and
5,000,000 shares of preferred stock, par value, $.01 per share ("Frontier
Preferred Stock"), of which, as of the date hereof, approximately shares of
Frontier Common Stock and shares of Frontier Preferred Stock, were issued
and outstanding, and shares of Frontier Common Stock were reserved for
issuance upon exercise of outstanding warrants and options;
WHEREAS, subject to the approval of the Frontier stockholders of a certain
Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, as
amended, and prior to the Effective Date, the Company intends to issue up to
10,106,700 shares of Frontier Common Stock, in exchange for certain assets of
Esenjay Petroleum Corporation and Aspect Resources LLC;
WHEREAS, pursuant to the terms of a Certificate of Designations of
Convertible Preferred Stock, the board of directors of Frontier has approved the
redemption of all of the issued and outstanding shares of Frontier Preferred
Stock prior to the Effective Date;
WHEREAS, the respective boards of directors of Frontier and Newco deem it
desirable and in the best interests of their respective corporations and their
respective stockholders to merge, pursuant to the provisions of Section 252 of
the General Corporation Law of the State of Delaware and Section 1082 of the
Oklahoma General Corporation Act, Frontier into Newco in exchange solely for
shares of the Newco Common Stock, and have proposed, declared advisable, and
approved such merger pursuant to this Plan and Agreement of Merger (the
"Agreement"), which Agreement has been duly approved by resolutions of the
respective boards of directors of Frontier and Newco; and
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein contained, and to prescribe the terms and conditions of
the merger, the mode of carrying the same into effect, the manner and basis of
converting the shares of Frontier Common Stock into shares of Newco
F-1
<PAGE>
Common Stock, and such other details and provisions as are deemed necessary or
proper, the parties hereby agree as follows:
ARTICLE I
MERGER
1:1 SURVIVING CORPORATION. Subject to the adoption and approval of this
Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, Frontier and
Newco shall be, upon the Effective Date, merged into a single surviving
corporation, which shall be Newco, one of the Merging Corporations, which shall
continue its corporate existence and remain a Delaware corporation governed by
and subject to the laws of that State.
1:2 STOCKHOLDER APPROVAL. This Agreement shall be submitted for adoption
and approval by the stockholders of each of the Merging Corporations in
accordance with the applicable laws of the States of Delaware and Oklahoma, at
separate meetings called and held for such purpose.
1:3 EFFECTIVE DATE. The merger shall become effective upon (i) the filing
of a Certificate of Merger with the Secretary of State of Delaware and the
issuance by the Secretary of State of Delaware of evidence of such filing, and
(ii) the filing of a Certificate of Merger with the Secretary of State of
Oklahoma and the issuance by the Secretary of State of Oklahoma of evidence of
such filing. The date upon which the merger shall become effective, as defined
by this Section 1:3, is referred to in this Agreement as the "Effective Date."
ARTICLE II
CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION
2:1 EXISTENCE. The identity, existence, purposes, powers, objects,
franchises, rights, and immunities of Newco, the Surviving Corporation, shall
continue unaffected and unimpaired by the merger, and the corporate identity,
existence, purposes, powers, objects, franchises, rights, and immunities of
Frontier shall be wholly merged into Newco, the Surviving Corporation, and Newco
shall be fully vested therewith. Accordingly, on the Effective Date, the
separate existence of Frontier, except insofar as continued by statute, shall
cease.
ARTICLE III
GOVERNING LAW AND CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATION
3:1 DELAWARE LAW GOVERNS AND NEWCO'S CERTIFICATE OF INCORPORATION
SURVIVES. The laws of Delaware shall continue to govern the Surviving
Corporation. On and after the Effective Date, the Certificate of Incorporation
of Newco, as in effect on the Effective Date, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in the
manner provided by law.
ARTICLE IV
BYLAWS OF SURVIVING CORPORATION
4:1 NEWCO'S BYLAWS SURVIVE. On and after the Effective Date, the Bylaws of
Newco as in effect on the Effective Date, shall be the Bylaws of the Surviving
Corporation until the same shall be altered, amended, or repealed, or until new
Bylaws shall be adopted in accordance with the provisions of law, the
Certificate of Incorporation, and the Bylaws of the Surviving Corporation.
F-2
<PAGE>
ARTICLE V
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
5:1 DIRECTORS OF SURVIVING CORPORATION. The incumbent directors of
Frontier immediately before the Effective Date shall constitute the board of
directors of the Surviving Corporation from and after the Effective Date, and
such persons shall hold office until their successors are, in accordance with
the Bylaws of the Surviving Corporation, elected and qualify.
5:2 OFFICERS OF SURVIVING CORPORATION. The incumbent officers of Frontier
immediately before the Effective Date shall hold the same respective offices of
the Surviving Corporation from and after the Effective Date and until the first
meeting of directors following the next annual meeting of stockholders thereof,
or until their successors are elected in accordance with the Bylaws of the
Surviving Corporation.
5:3 VACANCIES. On or after the Effective Date, if a vacancy shall for any
reason exist in the board of directors or in any of the offices of the Surviving
Corporation, such vacancy shall be filled in the manner provided in the
Certificate of Incorporation or Bylaws of the Surviving Corporation.
ARTICLE VI
CAPITAL STOCK OF SURVIVING CORPORATION
6:1 CAPITAL STOCK AS IN NEWCO'S CERTIFICATE OF INCORPORATION. The
authorized number of shares of capital stock of the Surviving Corporation, the
par value, designations, preferences, rights, and limitations thereof, and the
express terms thereof, shall be as set forth in the Certificate of Incorporation
of the Surviving Corporation as in effect on the Effective Date.
ARTICLE VII
CONVERSION OF SECURITIES ON MERGER
7:1 NEWCO'S CAPITAL STOCK. Each of the shares of Newco Common Stock issued
and outstanding immediately before consummation of the merger on the Effective
Date (all of which are owned by Frontier) shall be extinguished and deemed
canceled for all purposes upon the Effective Date.
7:2 CONVERSION OF FRONTIER' STOCK. On the Effective Date, each share of
Frontier Common Stock then issued and outstanding (excluding any Frontier shares
which may then be held in the treasury of Frontier, all of which shares shall
cease to exist), without any action on the part of the holders thereof, shall
automatically become and be converted into one fully paid and nonassessable
share of the issued and outstanding Newco Common Stock.
7:3 EXCHANGE OF FRONTIER'S STOCK CERTIFICATES. As promptly as practicable
after the Effective Date, each holder of an outstanding certificate or
certificates theretofore representing shares of Frontier Common Stock may
surrender the same to an exchange agent of and designated by the Surviving
Corporation and such holder shall be entitled upon such surrender to receive in
exchange therefor a certificate or certificates representing the number of whole
shares of Newco Common Stock into which the shares of Frontier Common Stock
theretofore represented by the certificate or certificates so surrendered shall
have been converted as aforesaid. However, before any surrender, each
outstanding certificate representing issued and outstanding shares of Frontier's
Common Stock shall be deemed for all purposes (other than the right to receive
any dividend payable by Newco, which shall be deferred until such certificate
surrender) to evidence ownership of the number of whole shares of Newco Common
Stock into which the same shall have been converted.
7:4 NEWCO FRACTIONAL SHARES. No certificates for fractional share
interests of Newco Common Stock will be issued.
F-3
<PAGE>
7:5 FRONTIER' TRANSFER BOOKS CLOSED. Upon the Effective Date, the stock
transfer books of Frontier shall be deemed closed, and no transfer of any
certificates theretofore representing shares of Frontier shall thereafter be
made or consummated.
ARTICLE VIII
AGREEMENTS OF FRONTIER AND NEWCO PENDING EFFECTIVE DATE
8:1 STOCKHOLDERS MEETINGS. Frontier and Newco will each hold separate
meetings of stockholders for the purpose of considering and acting upon a
proposal to approve and adopt this Agreement and the merger contemplated hereby.
If the holders of at least a majority of all the outstanding shares of Frontier
shall vote in favor of the merger at its meeting, then Frontier (as the sole
stockholder of Newco) will vote all the outstanding shares of Newco in favor of
the merger at the later convening Newco meeting on that same day.
ARTICLE IX
ASSETS AND LIABILITIES
9:1 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF
SURVIVING CORPORATION. On the Effective Date, all rights, privileges, powers,
immunities, and franchises of each of the Merging Corporations, both of a public
and private nature, and all property, real, personal, and mixed, and all debts
due on whatever account, as well as stock subscriptions and all other choses or
things in action, and all and every other interest of or belonging to or due to
either of the Merging Corporations, shall be taken by and deemed to be
transferred to and shall be vested in the Surviving Corporation without further
act or deed, and all such rights, privileges, powers, immunities, franchises,
property, debts, choses or things in action, and all and every other interest of
the Merging Corporations shall be thereafter as effectually the property of the
Surviving Corporation as they were of the respective Merging Corporations, and
the title to any real or other property, or any interest therein, whether vested
by deed or otherwise, in either of the Merging Corporations, shall not revert or
be in any way impaired by reason of the merger; PROVIDED, HOWEVER, that all
rights of creditors and all liens upon any properties of each of the Merging
Corporations shall be preserved unimpaired, and all debts, liabilities,
restrictions obligations, and duties of the respective Merging Corporations,
including without limitation all obligations, liabilities, and duties as lessee
under any existing lease, shall thenceforth attach to the Surviving Corporation
and may be enforced against and by it to the same extent as if such debts,
liabilities, restrictions, obligations, and duties had been incurred or
contracted by it. Any action or proceeding pending by or against either of the
Merging Corporations may be prosecuted to judgment as if the merger had not
taken place, or the Surviving Corporation may be substituted in place of either
of the Merging Corporations.
9:2 CONVEYANCES TO SURVIVING CORPORATION. The Merging Corporations hereby
agree, respectively, that from time to time, as and when requested by the
Surviving Corporation, or by its successors and assigns, they will execute and
deliver or cause to be executed and delivered, all such deeds, conveyances,
assignments, and other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, or its successors or
assigns, may deem necessary or desirable in order to vest or perfect in or
confirm to the Surviving Corporation, its successors and assigns, title to and
possession of all the property, rights, privileges, powers, immunities,
franchises, and interests referred to in this Article IX of this Agreement and
otherwise carry out the intent and purposes of this Agreement.
9:3 ACCOUNTING TREATMENT. The assets and liabilities of the Merging
Corporations shall be taken up on the books of the Surviving Corporation in
accordance with generally accepted accounting principles, and the capital
surplus and retained earnings accounts of the Surviving Corporation shall be
determined, in accordance with generally accepted accounting principles, by the
board of directors of the Surviving Corporation. Nothing herein shall prevent
the board of directors of the Surviving Corporation from making any future
changes in its accounts in accordance with law.
F-4
<PAGE>
9:4 CONSENT TO SERVICE OF PROCESS IN OKLAHOMA. The Surviving Corporation,
from and after the Effective Date of the Merger, agrees that it may be served
with process in the State of Oklahoma in any proceeding for the enforcement of
any obligation of Frontier as well as for the enforcement of any obligation of
the Surviving Corporation arising from the Merger, including any suit or
proceeding to enforce the right of any shareholder as determined in appraisal
proceedings pursuant to the provisions of Section 1091 of Title 18, Oklahoma
statutes, and irrevocably appoints the Secretary of State of the State of
Oklahoma as its agent to accept service of process in any such proceeding. Any
such process served upon the Secretary of State of the State of Oklahoma should
be forwarded to the Surviving Corporation, Esenjay Resources Corporation, One
Allen Center, Suite 2920, Houston, Texas 77002, Attn: General Counsel.
ARTICLE X
TERMINATION AND ABANDONMENT
10:1 TERMINATION. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the merger abandoned at
any time (whether before or after the approval and adoption thereof by the
stockholders of Frontier) before the Effective Date:
10:1:1 BY MUTUAL CONSENT. By mutual consent of Frontier and Newco;
10:1:2 BY FRONTIER OR NEWCO BECAUSE OF INSUFFICIENT FRONTIER
STOCKHOLDER VOTE. By Frontier or Newco, if the holders of at least a
majority of all the outstanding shares of Frontier shall not vote in favor
of approval and adoption of this Agreement and the merger contemplated
hereby at a special meeting of Frontier stockholders duly called and held;
10:1:3 BY FRONTIER OR NEWCO BECAUSE OF LEGAL PROCEEDINGS. By either
Frontier or Newco, if any suit, action, or other proceeding shall be pending
or threatened by the federal or a state government before any court or
governmental agency, in which it is sought to restrain, prohibit, or
otherwise affect the consummation of the merger contemplated hereby;
10:2 TERMINATION BY BOARD OF DIRECTORS. An election by Frontier or Newco
to terminate this Agreement and abandon the merger as provided in Section 10:1
shall be exercised on behalf of such corporation by its board of directors.
10:3 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to the provisions of Section 10:1 hereof,
this Agreement shall become void and have no effect, without any liability on
the part of any party hereto.
10:4 WAIVER OF CONDITIONS. Any of the terms or conditions of this
Agreement may be waived at any time by the party which is entitled to the
benefit thereof, by action taken by its board of directors, the executive
committee of its board of directors, or its president; PROVIDED, HOWEVER, that
no party hereto shall waive any term or condition hereof, unless in the judgment
of the board of directors, the executive committee, or president taking the
action, such waiver will not have a materially adverse effect on the benefits
intended under this Agreement to the stockholders of its or his corporation.
[SIGNATURE PAGE FOLLOWS]
F-5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective presidents and
attested by their respective secretaries, all as of the day and year first above
written.
<TABLE>
<S> <C> <C> <C>
ESENJAY EXPLORATION, INC.
(a Delaware corporation)
By: Attest:
------------------------------------- -------------------------------------
David W. Berry, PRESIDENT David B. Christofferson, SECRETARY
FRONTIER NATURAL GAS CORPORATION
(an Oklahoma corporation)
By: Attest:
------------------------------------- -------------------------------------
David W. Berry, PRESIDENT David B. Christofferson, SECRETARY
</TABLE>
F-6
<PAGE>
CERTIFICATES OF CORPORATE SECRETARIES
I, David B. Christofferson, secretary of Esenjay Resources Corporation, a
Delaware corporation ("Newco"), do hereby certify that the plan and agreement of
merger (the "Agreement") to which this certificate is attached, after having
been duly signed on behalf of Newco and having been duly signed on behalf of
Frontier Natural Gas Corporation, an Oklahoma corporation, was duly adopted
pursuant to section 252 of the General Corporation Law of the State of Delaware
on the day of , 1998, by the affirmative vote of the holders of a
majority of the outstanding shares of the common stock of Newco, which Agreement
was thereby adopted as the act of the stockholders of Newco, and the duly
adopted agreement and act of Newco.
WITNESS MY HAND, this day of , 1998.
--------------------------------------
David B. Christofferson, SECRETARY
I, David B. Christofferson, secretary of Frontier Natural Gas Corporation,
an Oklahoma corporation ("Frontier"), do hereby certify that the plan and
agreement of merger to which this certificate is attached, after having been
duly signed on behalf of Frontier and having been duly signed on behalf of
Esenjay Exploration, Inc., a Delaware corporation, was duly adopted pursuant to
Section 1082 of the Oklahoma General Corporation Act, on the day of
, 1998, by the affirmative vote of the holders of at least a majority
of the outstanding shares of the common stock of Frontier, which Agreement was
thereby adopted as the act of the stockholders of Frontier, and the duly adopted
agreement and act of Frontier.
WITNESS MY HAND, this day of , 1998.
--------------------------------------
David B. Christofferson, SECRETARY
F-7
<PAGE>
ACKNOWLEDGMENTS
<TABLE>
<S> <C>
THE STATE OF TEXAS
COUNTY OF HARRIS
</TABLE>
BEFORE ME, the undersigned authority, in and for said County and State, on
this day personally appeared David W. Berry, president, and David B.
Christofferson, secretary, of Esenjay Exploration, Inc., a Delaware corporation,
each known to me to be the person and officer whose name is subscribed to the
foregoing instrument and acknowledged to me that he executed said instrument as
the act and deed of such corporation for the purposes and consideration therein
expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this day of , 1998.
(SEAL)
--------------------------------------
NOTARY PUBLIC IN AND FOR HARRIS
COUNTY, TEXAS
------------------------
<TABLE>
<S> <C>
THE STATE OF TEXAS
COUNTY OF HARRIS
</TABLE>
BEFORE ME, the undersigned authority, in and for said County and State, on
this day personally appeared David W. Berry, president, and David B.
Christofferson, secretary, of Frontier Natural Gas Corporation, an Oklahoma
corporation, each known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that he executed
said instrument as the act and deed of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this day of , 1998.
(SEAL)
--------------------------------------
NOTARY PUBLIC IN AND FOR HARRIS
COUNTY, TEXAS
F-8
<PAGE>
FRONTIER NATURAL GAS CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
MAY 14, 1998
The undersigned shareholder of Frontier Natural Gas Corporation (the
"Company") hereby appoints David W. Berry and David B. Christofferson, or either
of them, attorneys and proxies of the undersigned, each with full power of
substitution to vote on behalf of the undersigned at the Special Meeting of
Shareholders of the Company to be held at the Company's headquarters at One
Allen Center, Suite 2920, Houston, Texas 77002, at 9:00 a.m. Houston time, May
14, 1998, and at any adjournments thereof, all of the shares of Common Stock in
the name of the undersigned or which the undersigned may be entitled to vote:
<TABLE>
<S> <C> <C> <C> <C>
1. Approval of the Aquisition Agreement.
/ / FOR / / AGAINST / / ABSTAIN
2. Approval of the Reverse Split.
/ / FOR / / AGAINST / / ABSTAIN
3. Approval of the Reincorporation.
/ / FOR / / AGAINST / / ABSTAIN
4. / / FOR the election (except as indicated below) of / / WITHHOLD AUTHORITY TO VOTE
for all nominees listed below
ALEX R. CRANBERG, MICHAEL F. JOHNSON, DAVID W. BERRY, ALEX B. CAMPBELL, CHARLES J. SMITH, JACK P. RANDALL AND
WILLIAM D. DODGE III AS DIRECTORS.
Instructions: To withhold authority to vote for any individual nominee, write that nominee's name on the line
provided below:
- -------------------------------------------------------------------------------------------------------------------
5. In their discretion, upon such other matters as may properly come before the Special Meeting; hereby revoking
any proxy or proxies heretofore given by the undersigned.
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
<PAGE>
(CONTINUED FROM OTHER SIDE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1,2,3, AND THE
ELECTION OF NOMINEES ABOVE, AND IF NO SPECIFICATION IS MADE, THE SHARES WILL BE
VOTED FOR PROPOSALS 1, 2, 3, AND THE ELECTION OF THE NOMINEES NAMED HEREIN. THE
UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF THE SPECIAL MEETING OF
SHAREHOLDERS AND THE PROXY STATEMENT.
DATED
----------------------------------- ,
1998
-----------------------------------
SHAREHOLDER'S SIGNATURE
-----------------------------------
SHAREHOLDER'S SIGNATURE
SIGNATURES SHOULD AGREE WITH NAME
PRINTED HEREON. IF STOCK IS HELD IN
THE NAME OF MORE THAN ONE PERSON,
EACH JOINT OWNER SHOULD SIGN.
EXECUTORS, ADMINISTRATORS,
TRUSTEES, GUARDIANS, AND ATTORNEYS
SHOULD INDICATE THE CAPACITY IN
WHICH THEY SIGN. ATTORNEYS SHOULD
SUBMIT POWERS OF ATTORNEY.
PLEASE SIGN AND RETURN IN THE ENVELOPE ENCLOSED
